How many people actually see the price signal? Quantifying market failures in the end use of energy

Alan Meier, Lawrence Berkeley National Laboratory
Anita Eide, European Commission, Energy Efficiency Unit

Keywords

market failures, market barriers, principal agent problem, energy efficiency, investment, behaviour, energy price, consumers

Abstract

“Getting the price right” is a goal of many market-oriented energy policies. However, there are situations where the consumer paying for the energy is separate from the owner of the energy-using device. Economists call this a “principal agent problem”. A team organised by the International Energy Agency examined seven end uses and one sector where principal agent problems existed: refrigerators, water heating, space heating, vending machines, commercial HVAC, company cars, lighting, and firms. These investigations took place in Australia, Japan, the Netherlands, Norway, and the United States.

About 2 – 100% of the energy consumed in the end uses examined was affected by principal agent problems. The size (and sometimes even the existence) varied greatly from one country to another but all countries had significant amounts of energy affected by principal agent problems. The presence of a market failure does not mean that energy use would fall substantially if the failure were eliminated; however it does suggest that raising energy prices—such as in the form of carbon taxes—will not necessarily increase efficiency investments.