How Large is the Owner-Renter Divide in Energy Efficient Technology? Evidence from an OECD Cross-section.

• Author: Krishnamurthy, Chandra Kiran B.

1. INTRODUCTION

   This paper addresses the question of whether differing incentives between home owners and tenants lead to sub-optimal investment decisions on the part of the owners. Beginning with the premise that more energy efficient investments are expensive, we address the following question: do problems related to imperfect information regarding home energy consumption characteristics (such as efficiency of insulation or of appliances already installed) on the part of the renter lead to under-investment in energy efficiency on the part of the home owner (who foresees, or has experienced, the lack of a premium for such characteristics)? This issue, labelled the "split incentive" effect in this context, has long been viewed as being of some importance; it is, in addition, viewed as part-explanation of the wider phenomenon of under-investment in energy efficiency, the so-called "energy efficiency gap" (see Allcott and Greenstone (2012) and references therein).

   However, while many studies (e.g. those in de T'Serclaes and Jollands (2007)) assume that certain situations with the potential for agency problems invariably lead to the said problems, there have been few empirical studies rigorously quantifying the magnitude of agency effects in a real-world setting. Prominent recent empirical studies include Davis (2011); Gillingham et al. (2012); Maruejols and Young (2011). The current study adds to the growing weight of evidence indicating a sizeable magnitude of these effects. This study follows these recent ones in using the approach (in the terminology of Allcott and Greenstone (2012), p.19) of testing if observed market equilibria are consistent with imperfect information. In other words, the approach used is to test if the observed market equilibrium, that owners under-invest in energy efficiency in tenant-occupied homes, supports the hypothesis of a principal-agent problem when conditioned on relevant observable differences between tenants and home owners. It differs from the studies cited above in using a representative sample from a large number (11) of OECD countries, as well as a survey data set richer in other dimensions (see section 2). This wide geographic coverage should help address, to an extent, concerns of external validity of studies based on narrow geographies, noted in Allcott and Greenstone (2012).

   The landlord-tenant divide in energy efficiency is a long-standing issue in the energy economics literature (see for instance Allcott and Greenstone (2012); Davis (2011); Gillingham et al. (2012); Jaffe and Stavins (1994)). There are essentially two variants of this issue (or two principal-agent problems), depending upon the agent making the decision and the one bearing the marginal cost of usage (see Gillingham et al. (2012) and de T'Serclaes and Jollands (2007) for a taxonomy of agency issues in energy consumption). In the first variant (the technology-choice or investment-related variant), when the tenant pays the utility bills, landlords have little incentive to invest in more costly energy efficient technologies/appliances. In the second variant (the usage-related variant), when landlords bear the marginal cost of usage, tenants have little incentive to optimize energy use and therefore, use more energy than they would otherwise have, irrespective of both energy efficiency and of which agent makes the investment.

   In this study we focus on the investment-choice-related principal-agent problem, wherein the owner ("agent") makes an appliance (e.g. refrigerator) or technology (e.g. thermostat/wall insulation) choice for the tenant ("principal") who bears the cost of usage (energy costs). The agent's decision leaves the principal with potentially higher electricity costs. Empirically, this can be observed in the data in the form of fewer energy efficient devices/technologies to which the tenant has access, relative to the owner. Put another way, when owners provide most of the appliances/technology, controlling for differences in observable characteristics and preferences (and ignoring unobserved heterogeneity), differential access to energy efficient technologies between tenants and owners is a reflection of the investment-related principal-agent problem.

   Prior studies related to the landlord-tenant divide can be categorized into two major types. The first type of studies assume that certain situations with potential for investment-related agency problems invariably lead to "split incentives" effect and turn to quantifying the effect of this agency problem, usually upon energy usage or carbon emissions. Examples include the analyses in Murtishaw and Sathaye (2006), which quantify the effects--in terms of energy savings--of both investment and usage inefficiencies; and in de T'Serclaes and Jollands (2007), wherein empirical studies for the US and the Netherlands make assumptions similar to those in Murtishaw and Sathaye (2006). The second type of studies, empirical in nature, attempt to quantify the magnitude of the "split incentives" effect in a real-world setting, accounting for a variety of factors which affect investment and usage decisions; these studies also frequently provide an idea of the counterfactual scenario, with the inefficiency removed.

   An early study in the empirical strand is that of Levinson and Niemann (2004), which attempts to quantify the impact of the usage inefficiency for the U.S., using the Department of Energy's RECS (Residential Energy Consumption Survey). This study reports modest usage-related "split incentive" effects, and therefore, low impact on total energy consumption from this effect. Gillingham et al. (2012) is a study which quantifies, using a representative sample from the RASS (Residential Appliance Saturation Survey) for California, both usage- and investment-relatedagency effects. This study finds only modest evidence for higher heating settings (i.e. usage effect) when tenants do not pay for heating, and a substantial effect on investment, of up to 20% reduction in probability of being insulated. Another important study is Davis (2011), which attempts to quantify the magnitude of the investment-related "split incentive" effect for appliances. This study reports moderate effects for different appliances, of at most 10% reduction in probability of a tenant having access to an energy efficient (energy-star rated) appliance. Finally, Maruejols and Young (2011) assess the significance of both variants of agency problems for the case of apartments (multi-unit dwellings) in Canada, and report only moderate usage effects and a small investment effect. (1)

   The current study is similar to those of Davis (2011) and Gillingham et al. (2012), in using observed market equilibria to rationalize and quantify the agency effect. However, the analysis here moves beyond these two in two important dimensions: first, geographic and dwelling coverage is broader and second, it addresses virtually all energy consuming technologies, both appliances and heating/cooling. Finally, the somewhat unique nature of the survey allows a disentangling of the issue of a tenant "having access to" a certain energy efficient technology, in that we can identify if the energy efficient technology in question, in tenant-occupied homes, exists as a result of the owners' investment or the tenant's. The main drawback of the current study is the lack of significant sample sizes for energy consumption and the difficulty of dealing with unobserved heterogeneity (an issue whose importance is highlighted in Gillingham et al. (2012) and Allcott and Greenstone (2012)), given that only a single cross-section is available for use. Further, we are unable to identify which appliances are top-rated for energy efficiency and can only provide an overall figure for the presence of at least one top-rated energy efficient appliance.

   We find a sizeable investment-related agency effect, quantified in terms of "ownership effects" on the probability of having access to the relevant energy efficiency technology. For appliances (excluding ACs, which are usually not provided by owners), this effect is very large, about 45%, which is at least four times as large as the largest effect in Davis (2011); for energy efficient bulbs it is an even larger 50%, although the practical implications of this are rather unclear, given its extremely portable nature. For technologies such as ground source heat pumps, wind turbines and solar panels, we find either no effect at all or only minimal effects (for solar panels, at 2.5%), which is consistent with the empirical observation that these tend to be very location specific and are likely driven by both increasing returns (at the level of the country) and local regulations/incentive structures (heat pumps and solar panels). For the heat thermostat, a relatively mobile yet moderately expensive investment, we find lower (yet sizeable) effects, at 9.8%. Finally, for different types of insulation (roof/walls, windows), we find sizeable effects (9.5 and 12.4% respectively), which are well within the ranges for insulation of different types reported in Gillingham et al. (2012).

   The rest of the paper is structured as follows: section 2 provides an outline and basic summaries of the survey data used for the analysis; section 3 lays out the empirical framework, discusses the main results and provides evidence for robustness of the results to a variety of plausible alternative explanations for the observed effects; section 4 concludes.

2. SURVEY DETAILS AND SUMMARY STATISTICS

   2.1 Survey and Data

   Data for the analysis were drawn from the OECD's project on Greening Household Behaviour, as part of which a periodic survey on Environmental Policy and Individual Behaviour Change (EPIC), covering a number of countries and areas, is carried out. The second survey was carried out in 2011, and included 11 countries: Australia, Canada, Chile, France, Israel, South Korea, Japan, the Netherlands...