5 - Economics of Energy Efficiency

Summary

In this chapter, we discuss some important elements of the economics of energy efficiency. We start by illustrating the definition of energy efficiency from a microeconomic point of view and then describe the most important empirical methods to measure the energy efficiency of an economy, a region, a firm, or a household. Afterwards, we present how households can evaluate investments in energy efficiency. To this end, we introduce the concept of lifetime costs. A central discussion of this chapter is developed on the concept of energy efficiency gap, that is a situation in which economic agents don’t invest in the most energy-efficient solutions, although they may be the most beneficial. We then explain the barriers that give rise to the energy efficiency gap, paying special attention to behavioural anomalies, in particular bounded rationality and the role of energy-related financial literacy. At the end of the chapter, we also present the rebound effect and discuss issues in developing countries related to the topics discussed in the chapter.