Discounting Energy Savings: Lessons from Incandescent Light Bulbs

Consumers express their preferences for products through their purchases. In the case of residential light bulbs, many consumers have stuck with the banned incandescent light bulb, despite the energy and cost-savings associated with switches to compact fluorescent lamp (CFL) and light-emitting diode (LED) technology. In fact, a recent survey found that only 40% of consumers even knew that the incandescent light bulb was banned, and, as of 2010, incandescent bulbs still provided approximately half of all lighting service.

In “Labeling Energy Cost on Light Bulbs Lowers Implicit Discount Rates,” Jihoon Min, Inês L. Azevedo, Jeremy Michalek, and Wändi Bruine de Bruin study the light bulb preferences of consumers to determine how consumers value the different features and future cost savings of light bulbs. They find that on average consumers value compact fluorescent bulbs more than incandescent bulbs but not as much as the cost savings may imply. Additionally, the researchers find that labeling the cost savings on the bulbs increases the valuation by consumers.

Min et al. started by surveying individuals to find the five most important characteristics of a light bulb to consumers. These characteristics are price, energy use, color, lifetime, and brightness. The authors used these characteristics to create 36 different light bulb variations. Survey respondents were then digitally presented with three different variations at a time and asked to select their preferred light bulb for twelve different simulations. Over the course of these preference questions, half of respondents were presented with the additional variable of annual operating cost.

The authors used this data to formulate two models. The first model was the consumer utility model, which used the data to formulate willingness-to-pay valuations. This model found that, on average, consumers are willing to pay an additional $2.63 for CFL bulbs. This figure had high variance, however, and many respondents were willing to pay more for incandescent bulbs. The authors also found that consumers were willing to pay an additional $0.52 for every additional 1,000 hours of bulb lifetime, but when consumers were aware of the annual operating costs, this figure increased to $0.66. In addition, the authors found that consumers’ perceived danger of the toxicity in CFLs was a significant variable in the valuation of the bulbs, while consumers’ perceived dangers of climate change were not a significant variable.

In the second model, the authors used the data to calculate the rate at which consumers discount the future energy savings provided by a CFL light bulb. A higher discount rate means that a consumer is not willing to pay as much now for higher cost-savings in the future. In this model, the authors found that consumers discount 100 percent on average when they are aware of future operating costs and discount 560 percent on average when they are not aware of future operating costs. Low-income individuals had considerably higher discount rates (182 percent with future cost awareness and 764 percent without cost awareness) than high-income individuals (36 percent and 203 percent, respectively.)

Even when considering only consumers aware of future cost savings, this discount rate implies consumers are either skeptical of or pay little attention to reported future cost savings, suggesting that many consumers are considering factors outside of economic savings when making their light bulb purchasing decisions. According to the authors, the fact that perceived toxicity of CFLs is a significant variable affecting valuation suggests that manufacturers or policymakers could do a better job communicating the safety of their products while focusing less on environmental benefits and beliefs, which were not shown to increase bulb valuation.

Labeling bulbs with their energy savings clearly allows for consumers to better value future energy costs, and this research definitively supports the Federal Trade Commission’s decision to label light bulbs’ future energy savings. These results suggest that other energy-saving products should be labeled with their future savings, and a government seeking a product switch should mandate or encourage this labeling. Overall, there are clear cost savings to more energy efficient light bulbs to the individual, but policymakers looking to improve energy efficiency have to navigate consumer preferences in order to maximize efficiency.

Article Source: Jihoon Min, Inês L. Azevedo, Jeremy Michalek, and Wändi Bruine de Bruin, “Labeling Energy Cost on Light Bulbs Lowers Implicit Discount Rates,” Ecological Economics 97 (January 2014): 42-50.

Feature Photo: cc/(Bes Z)