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Edited by William C. Clark, Harvard University, Cambridge, MA, and approved February 3, 2017 (received for review September 13, 2016)
Significance
We show that a simple and common price incentive is highly effective in reducing electric energy consumption (EEC). When EEC is billed and metered at the apartment level compared with when tenants have unlimited EEC included in the rent, annual EEC falls by about 25%. Moreover, the reduction in EEC comes almost exclusively from households with very high EEC before the policy change. The results suggest that most tenants benefit, whereas only a small group of free riders stand to lose from this policy change. The policy is cost-effective, with a cost per reduced kilowatt hour of US$0.01, and for each invested dollar, the social value of reductions in air pollution, including CO2, is $2.
Abstract
This article shows that a simple monetary incentive can dramatically reduce electric energy consumption (EEC) in the residential sector and simultaneously achieve a more desirable allocation of EEC costs. The analyses are based on data from a policy experiment conducted in 2011 and 2012 by a private housing company in about 1,800 apartments. Roughly 800 of the tenants (treatment group) were subject to a change from having unlimited EEC included in their rent to having to pay the market price for their own EEC. This change was achieved by installing EEC meters in each apartment. Tenants in the other 1,000 apartments (control group) experienced no policy change and were subject to apartment-level billing and metering during the entire study period. Using a quasiexperimental research design and daily data on EEC from 2007 to 2015, we estimate that apartment-level billing and metering permanently reduce EEC by about 25%. Moreover, we show that households reduce EEC immediately after being informed that they will be billed for EEC, the reduction is larger when the production cost is higher, and the reduction in EEC comes almost exclusively from households with very high EEC before the policy change. Finally, we show that apartment-level billing and metering are cost-effective, with a cost per reduced kilowatt hour of US$0.01, and for each invested dollar, the social value of reductions in air pollution, including CO2 emissions, is $2.
Footnotes
↵1M.E., S.E., and I.P. contributed equally to this work.
- ↵2To whom correspondence should be addressed. Email: mikael.elinder{at}nek.uu.se.
Author contributions: M.E., S.E., and I.P. designed research, performed research, analyzed data, and wrote the paper.
The authors declare no conflict of interest.
This article is a PNAS Direct Submission.
This article contains supporting information online at www.pnas.org/lookup/suppl/doi:10.1073/pnas.1615290114/-/DCSupplemental.
Freely available online through the PNAS open access option.
Price incentives, free riding, and energy use
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