|| 1

Energy efficiency gap, bounded rationality and the

role of energy related financial literacy

Kennedy school of Government, September 2018

Massimo Filippini

||

Introduction

Energy efficiency gap and bounded rationality

Level of financial and energy related financial literacy in three European

countries

Paper: The Impact of Educational Programs and Online Support Tools on

the Choice of Appliances

Research questions and literature

Data and experimental design

Econometric analysis and results

Conclusions

2

Outline

Energy related financial literacy, bounded rationality and the energy efficiency gap

|| 3

Energy efficiency gap and bounded rationality

||

444

• To fight climate change we

need to cut CO2 emissions

in order to limit the average

global temperature increase

to 2°C

• Increase of the level of

energy efficiency is crucial

• Residential sector one of the

areas with the greatest

potential for energy savings

Source: International Energy Agency

4

Energy efficiency and climate change

|| 5

Blasch et. Al. (2017) :

residential Swiss households;

disaggregate panel data ~30%

Alberini and Filippini (2016):

residential US states ; disaggregate

panel data ~25%

||

inefficient use of electrical

appliances / heating system

Inefficiency in the use of energy in the residential sector may

be due to

low adoption of new energy-efficient

technologies (energy efficiency gap)

Energy consumption strongly influenced

by investment decisions (type of cars,

electrical appliances, houses,…)

6

||

Energy efficiency gap

Social view: “We define the “energy-efficiency gap” as the apparent reality that some

energy-efficiency technologies that would be socially efficient are not adopted” (social

optimality). (Gerarden, Newell and Stavins (2015))

Private view: Individual decision-makers do not choose the most energy-efficient

technology, even if this technology is also the most cost-efficient choice (min lifetime costs).

Market failures

Negative externalities

Lack of information (information not salient

enough, only kWh,..)

Asymmetric information

…….

Behavioral failures

Bounded rationality

Prospect theory (status quo bias, loss

aversion,..)

…….7

||

Bounded rationality and energy related investment decisions

• Renovation of a house, change of the heating system, substitution of an

electrical appliances, buying a new car,… are decisions that show benefits and

costs over a long period of time

From an economic point of view these decisions imply an intertemporal

optimization

In order to make these complex decisions, individuals need to collect

information, make assumption regarding the price, utilization over the life

cycle, perform an investment analysis or calculate the lifetime cost

8

||

Different decision-making strategies

Rational consumer

make decisions using information

and cognitive skills to calculate

the lifetime cost

Rational decision-making

Choose the appliance that

minimizes lifetime usage cost

based on upfront price energy

price, intensity of use, lifetime

Bounded-rational consumer make decisions using limited information

and with cognitive constraints in

processing information

Heuristic decision-making

Choosing by comparing purchase prices

Choosing by comparing the energy label

Choosing by comparing energy

consumption

...

choices that are simply „good enough“9

|| 10

Age

Rational decision-making Heuristic decision-making

EducationIncome

Gender

Energy related

knowledge

AttitudesFinancial

literacy

……

||

Level of financial and energy related financial

literacy in three European countries

11

||

UNICEF: ability to use reading, writing and numeracy skills for effective

functioning and development of the individual and the community

In the last decades the word «literacy» has been used in a much broader

way, methaphorical way….information literacy, media literacy, scientific

literacy, financial literacy, energy literacy

12

Definitions literacy

||

Financial literacy:

“Knowledge of basic financial concepts, such as the working of interest

compounding, the difference between nominal and real values, and the

basics of risk diversification” (Lusardi and Mitchell (2008))

Financial literacy is usually measured using three questions

Interest rate

Compound interest

Stock option (risk diversification)

13

Financial literacy

||

Energy literacy:

Energy Literacy is an understanding of the nature and role of energy in the

world and daily lives accompanied by the ability to apply this understanding to

answer questions and solve problems.

(U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy )

Energy related financial literacy

the combination of energy-related knowledge and cognitive abilities that are

needed in order to take decisions with respect to the investment for the

production of energy services and their consumption

(Blasch, Boogen, Daminato and Filippini (2018)

14

Energy literacy and Energy related financial literacy

||

Energy related financial literacy measured with several questions

Lifetime cost

Energy prices

Usage cost of appliances

Knowledge of energy saving of different technologies

Interest rate

Compound interest

Stock option (risk diversification)

15

Measurement of energy related financial literacy

|| 16

Source: Blasch et. Al. (2018)

Results for a sample of 4600 European householdsPenny project, EU

|| 17Source: Blasch et. Al. (2018)

|| 18Source: Blasch et. Al. (2018)

|| 19

Narrowing the energy efficiency gap: The impact of

educational programs, online support tools and

energy-related investment literacy

J. Blasch, M. Filippini, N. Kumar and A. Martinez

||

1. What is the specific role of energy and financial literacy for the

choice/identification of cost-efficient appliances?

2. What is the specific role of educational programs and online support

tools for the choice/identification of cost-efficient appliances?

20

Research questions

||

The role of financial literacy

Lusardi and Mitchell (2007,2009) show that financial literacy has a positive

impact on financial decisions

The role of energy and investment literacy

Dwyer (2011) and Zografakis et. Al (2008)

Energy literacy has a positive impact on energy efficiency

Blasch et al. (2017a, 2017b), Brounen et al. (2013)

Positive impact of the level of energy and financial literacy on energy

efficiency

Insight from prior research (1)

21

||

Effectiveness of energy labelling/information

Heinzle (2012), Newell and Siikamaki (2013); Houde (2014)

Mixed results on the impact of labelling on energy efficiency

Allcott and Taubinsky (2015); Allcott and Sweeney (2015), Blasch. Et. Al. (2017a)

Positive impact disclosing lifetime cost

No effect of more information trough sales agents on energy efficiency

Positive impact of providing monetary information on energy efficiency

Insight from prior research (2)

22

||

Impact of providing information on operating cost

Blasch et. Al. (2017)

23

We tested the effectiveness of providing more

information using an online randomized

control experiment

positive

||

Effectiveness of decision support tools in saving and financial decisions

Goda et. Al. (2014) more information on retirement income projections has an

impact on saving

Bernheim (2001) and Savikhin (2013) provide evidence that visual analytics tools

and financial educational programs have positive effects on financial decisions

First paper to analyze the impact of educational programs and investment

calculators on energy efficiency

Insight from prior research (3)

24

|| 25

Experimental design and data

||

Online randomized control experiment

Identify the appliance with lowest lifetime cost

Econometric methods the impact of energy and financial

literacy and educational program/ calculator on the probability to

identify the cost-minimizing appliance

'

2 1= ENLIT INVLIT TRSLIDE CALC EN MA TSL TCAL INV itCHOICE x INVCALC u

Based on a theoretical model we developed some hypothesis

Organized 2 online surveys and

collected data on Swiss households (N ~6000)

Socioeconomic factors,

Energy, financial literacy,

energy consumption,

appliances,…

Treated group

(educational program,

calculator)

Control group

26

||

Two separate household-

level online surveys in

2016 from Switzerland

SHEDS (Household panel

survey)

covers German and

French speaking regions

of Switzerland

5,015 households

Representative sample

Data survey 1

27

||

HSEU-Bern

Utility customers of EWB

( Region of Bern)

916 households

Representativeness

difficult to comment

limited availability of

reference data at regional

level

Data survey 2

28

||

ExperimentIdentification of the most (cost-)efficient appliance

29

||

Both surveys implemented a randomized controlled experiment to identify

(not to choose) the most cost-efficient appliance among two refrigerators

Random assignment to one of the three groups

CONTROL – the control group

TRSLIDE – treatment 1 that sees a set of education-slides

TRCALC – treatment 2 that has access to a simple web-based online

calculator

Experiment Design

30

|| 31

T1: slides

T2: calculator

Online randomized controlled experiment

||

Experiment – treatments

Treatment 1

Treatment 2

32

||

Experiment – treatment 1 (Slides)

33

||

Experiment – treatment 2 (Calculator)

34

||

Experiment – debriefing questionchoice of an investment analysis approach

35

|| 36

Descriptive statistics

|| 37

Econometric analysis

||

Two binary choices

Choice to do or not to do a lifetime cost calculation

Correct identification of the refrigerator with the lower

lifetime cost

Bivariate probit (BP)

Recursive bivariate probit (RBP)

38

Estimation Strategy

||

Bivariate probit (BP)

The BP models the two binary decisions as a seemingly unrelated system

of two probit equations, and capture the correlation in the decision via the

correlation between the error terms

The BP models doesn’t consider the sequential nature of the decisions

39

Estimation Strategy

||

Sequential nature of the decisions

In the first step a lifetime cost calculation is carried out or not

In the second step, conditional on the result of the lifetime cost calculation, the

respondent chooses the refrigerators that he or she believes minimizes the

lifetime cost

Recursive bivariate probit

40

Estimation Strategy

||

Dependent variables:

choice of an investment analysis approach (INVES)

choice of the most (cost-)efficient appliance (CHOICE)

Explanatory variables:

socio-demographics (age, gender, education, income)

measures of energy and investment literacy

pro-environmental attitude

treatments

Control for ordering effects

41

Estimation Strategy

|| 42

Results

||

In a RBP, it is possible to compute a direct, an indirect effect and a

total marginal effect of a given variable on the second outcome, i.e.

identification of the refrigerator with the lower lifetime cost.

The direct effect of a variable occurs ‘directly’ in the second equation on

the selection of the refrigerator.

The indirect effects occurs via the effects on the decision to calculate

and compare lifetime costs (the first equation) as this decision variable

is also an explanatory variable in the second equation.

43

Estimation results – marginal effects

||

Estimation results – marginal effects An increase of the energy and

investment literacy increases the

rate at which individuals select

the most cost-effective refrigerator

Individuals who perform a lifetime

cost analysis are more likely to

choose the more cost-efficient

appliance

Both interventions are effective at

increasing the chances that a

cost-effective refrigerator is chosen

The online calculator is more

effective than the educational

program

44

||

From an energy policy point of view the results suggest that to improve, at least

partially, the level of energy efficiency we could

Promote educational training on energy and investment related topics

Provide decision support tools such as online or mobile phone calculator tools

Provide decision support tools such as a calculator at the point of sale

empowerment of the consumers

45

Conclusion I

||

More general:

The effectiveness of the introduction of environmental taxes/subsidies can

increase if people are informed and have a high level of energy related financial

literacy

Mixture of energy policy instruments: education, information, taxes and subsidies

and standard

46

Conclusion II

||

Thank you for your attention!

Blasch J., Filippini M., Kumar N., Martinez-Cruz A. (2017). Investment literacy and Choice of Electric

Appliances: The Impact of Educational Programs and Online Support Tools, CER-ETH Working Paper No. 276.

Blasch, J. E., Filippini, M., Kumar, N. (2017). Boundedly rational consumers, energy and investment literacy,

and the display of information on household appliances. Resource and Energy economics

Blasch J., Boogen N., Daminato C., Filippini M. (2018). Empower the consumer! Energy-related financial

literacy and its socioeconomic determinants CER-ETH Working Paper No. 289.

47

Questions/Discussion…