More than a Price Decrease

Energy conservation plays a decisive role in climate change mitigation. To boost conservation efforts, policy-makers increasingly rely on energy efficiency subsidies. Yet, it is not well understood why subsidies affect demand. The paper presented in this ZEW QUEST Seminar conjectures two drivers,  (i) the decrease in purchasing price and (ii) the normative recommendation for action implicit in policy regulation. They use a framed field experiment to test a subsidy on an energy-saving showerhead, and compare its effectiveness to a pure price decrease. The authors find that both the price decrease and subsidy significantly increase demand for the energy-saving showerhead. Yet, the demand response to the subsidy is 7 percentage-points stronger. An analysis of the underlying channels suggests that this additional demand response is explained by a shift in the individual perception of the social desirability of the showerhead. Results imply that an energy efficiency subsidy gives more value than the money spent.