At every level of government—from a small rural community in the U.S. to the entire European Union—there’s one common energy policy that everyone seems to agree on: energy efficiency. Theoretically, it has its benefits. Saving energy saves money. It also reduces pollution and the emissions that cause climate change. And, in developing countries where energy access is a major problem, it conserves more energy for those who have none.
Yet, for all the appeal of energy efficiency as a goal, more and more economists are finding that energy efficiency policies don’t actually work all that well. Take my colleague Michael Greenstone. He and his coauthors studied an energy efficiency program in Michigan and found the costs to implement the program greatly exceeded the benefits. He’s not alone. A growing field of research is focused on assessing energy efficiency policies, and is finding similar discouraging results (see more here). The point in all this research is not to denounce the goals of energy efficiency and energy conservation. Rather, the studies demonstrate that policies must be tested before being widely implemented.
Work in the United States continues to test those policies and is showing that when households are given information that compares their electricity use to that of their peers, they tend to reduce consumption. But we know little about how this behavior translates to the developing world, with different cultural norms, incomes and consumption levels. That’s where a new study of mine comes in.
I found that when Indian households are given information that compares their electricity use to that of their peers, combined with tips on how to save, they reduce their electricity use by as much as 7 percent. Curiously, however, if these comparisons are complemented with financial rewards—a sort of cherry on top—they don’t respond at all. That result seems counter-intuitive, and is not good news for policymakers tempted to mix and match monetary incentives and behavioral cues. Why? One clue may be provided by research describing how monetary contracts create issues of trust because the recipient will often begin second guessing the motivations behind the contract.
First, a little background on my study. During the summer of 2012, an estate management company that ran a housing community in New Delhi, India, decided to pilot two programs aimed at reducing household electricity consumption. Some households received report cards comparing their electricity usage to that of their peers and providing tips for ways to save. Another group received the same report cards, but were also enrolled in a financial rewards program where they received money, or lost money, for reducing, or increasing, their electricity consumption in comparison to their peers. I used these programs to run an experiment to see how these two different elements—information to ‘nudge’ behaviors and financial incentives—performed.
The findings seem surprising from an economic standpoint. But, not so much when the psychology of decision-making is brought in. Inherently, people tend to trust their neighbors. They also tend to want to ‘keep up with the Joneses.’ So, when these households saw how their energy use stacked up against their peers, they believed they could achieve the same results with just a little effort—taking the tips provided to save energy. (A study of postgraduates in London found similar results.)
Households reacted entirely different when they were told they would receive money for reducing their energy use. It seems counterintuitive. But, a fundamental distrust in “big brother”—whether that be the government, or in this case, a utility—may have kicked in. Households questioned the underlying motivations: “Why is a utility paying me? What’s in it for them? And, is it going to cost me in the end?” In reality, there was no hidden agenda on the part of the utility. But households didn’t trust that. So, they didn’t participate in the program, and they didn’t save.
This distrust may explain why so many energy efficiency programs that rely on financial incentives end up failing. People genuinely believe that when money is given to them, they’re going to owe something in return. And, that’s a big problem for policymakers trying to structure programs that work.
Importantly, this study was conducted in a developing world context. It is quite possible that the distrust in this context is higher than in other countries like Europe or the U.S. So, clearly more work needs to be done to see if these findings hold true elsewhere. Such research would certainly have an important place in policy conversations.
Until then, the study of households in India did deliver encouraging news for energy efficiency supporters. When policymakers want households to save energy, try letting them see how their energy use compares to that of their peers, and resist the urge to pile on too many other incentives. This may just deliver the energy-savings results they are looking for.
In this landscape where policymakers can’t seem to agree on any policies, let’s grab hold of the one policy they have always embraced. But, let’s make sure we get it right this time.