With Energy Labels, One Size Doesn’t Fit All

In the search for different ways to save energy, governments since the 1970s have attempted to influence consumer preferences by providing information regarding the energy efficiency of products, such as home appliances and cars. For instance, certifications like Energy Star signal to consumers that products carrying this distinction are friendlier to the environment. But are there better methods to effectively inform and incentivize energy savings? A recent publication raises several questions about current labeling systems and what governments can expect from giving this kind of information to consumers.

As in other countries, all major appliances sold in the US must be labeled. These labels are designed by the Federal Trade Commission. They are the same throughout the country, despite the fact that there are huge differences in the cost of energy and usage time in different parts of the country. For example, the cost of energy is twice as high in New York as it is in Louisiana. On the other hand, the annual number of hours of air conditioning usage in Florida is nine times that in Maine. So, a first question about these labeling systems should be: is a “one label fits all” system the best way to inform consumers?

The authors, Lucas Davis and Gilbert Metcalf, ran an experiment in which two groups were shown three air conditioners identical in all features except price and energy efficiency. The control group was shown current labels used in the US—efficiency of air conditioning based on national averages of usage and energy costs. The treatment group saw similar labels but with information customized to participants’ states of residence. Based on these labels, participants were asked to choose which of the three devices they would most likely purchase. To better understand the behavior of the participants, the authors divided participants’ states into three groups, ranked by operational costs in each state: low, medium, and high energy costs.

The consumers in the control group did not show differences in their choices within the group, regardless of the state in which they lived. On the other hand, people in the treatment group who were shown state-specific labels responded differently: in high energy-cost states, participants preferred the more efficient devices; in low-cost states, they chose less energy efficient devices. This result is interesting because, with national labels, there could be two possible investment errors: (i) people in low-cost states over invest in air conditioners that are efficient but not worth the investment, or (ii) in high-cost states, people underinvest in more efficient equipment.

The results show that people who are exposed to customized labels on air conditioning units can save, on average, 10 dollars in lifetime costs (over a span of 12 years). Such energy savings seem unimportant individually, but, nationwide, they add up to 44.5 million dollars per year. These are huge savings, considering the low cost of implementing such labeling changes and the possibility of expanding this kind of labeling to other major appliances that, in 2014, jointly accounted for 60 percent of US residential energy consumption.

In trying to understand how the experiment fits the actual preferences of consumers, the researchers complement their findings with revealed preferences of consumers using Energy Star certification data. The authors find that this certification does not shift preferences in high-cost state consumers toward more efficient equipment. This behavior may be explained by other characteristics that are important to consumers, such as brand or color.

The paper also raises the issue of the “rational inattention” of consumers. Because the difficulty surpasses the benefits of calculating savings and energy efficiency specific to their own states, people rationally prefer not to become informed. However, although individuals’ gains in efficiency can be modest, once aggregated, they can be significant.

Information about energy consumption is not always straightforward. Moreover, the savings per household may not be worth the cost to an individual consumer, and consumption patterns vary widely among states. Governments may help on energy savings by providing more detailed information to consumers. This action would decrease the information costs for consumers, shift consumer preferences, and lead to significant savings and efficiency.

 

Article Source: Davis, L. and Metcalf, G. “Does Better Information Lead to Better Choices? Evidence from Energy-Efficiency Labels” NBER Working Paper 20720, November 2014

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Pablo Eguiguren
Pablo Eguiguren is a staff writer for the Chicago Policy Review. He is interested in regulations.

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