Carl Blumstein and Margaret Taylor “Rethinking the Energy-Efficiency Gap: Producers, Intermediaries, and Innovation” (May 2013) | WP-243

The economic justification for energy efficiency policy primarily focuses on market failures and barriers that prevent energy consumers from undertaking privately profitable investments in efficiency. These consumer-oriented market imperfections are the subject of a substantial and growing body of research regarding human behaviour and economic incentives that influence the demand for energy-efficient technologies. But the literature has focused much less on the producers of energy efficient technologies, and intermediaries such as retailers, who supply technology choice sets for consumer adoption as a result of their competitive strategy (which includes decisions regarding research and development activities, supply chain management, risk management, marketing approaches, etc.). This paper focuses on the question: How could supplier strategy issues help explain the observed “energy efficiency gap” between the privately optimal energy efficiency of goods and services and the actual energy efficiency of goods and services? We begin by providing background on the energy-efficiency gap and the different intellectual paradigms that have been brought to bear on it. Then we provide examples from the literature of apparent market imperfections on the supply side of energy-efficient technology development, including documentation of the concentration of the industries involved in the manufacture of appliances and other products that energy-efficiency policy efforts address. A central point of the paper is the observation that the efficiency gap is dynamic, changing over time and with the processes of innovation; the invention of new, more energy-efficient technologies can widen the gap, while the refinement and take-up of such technologies can narrow it. We conclude with a discussion of interventions on the supply side that could encourage a reduction in the energy-efficiency gap.