To reduce emissions that lead to pollution and climate change, policymakers around the world rely on energy efficiency policies. Yet, by far the greatest share of future energy consumption will come from the developing world. Identifying ways to encourage conservation is therefore an urgent policy priority. Which policies could best encourage households to save? That has been a trial-and-error exercise for policymakers for years. Now, a new analysis using India as a case study suggests one approach that might be both successful and easily implemented.
“With three hundred million people lacking access to reliable electricity in India, finding a way to conserve electricity is an essential policy objective,” says Anant Sudarshan, the author of the study and director of the Energy Policy Institute at the University of Chicago’s India office (EPIC-India). “This study demonstrates significant impacts via an approach that relies on simply telling households how they compare with their peers, and thus ‘nudging’ them to make the right choices. But it also shows how complicated human behavior can be. We provide new evidence showing that mixing monetary rewards and behavioral cues can turn into something that is less, not more, than the sum of its parts”.
Sudarshan used an experiment where one group of households received report cards comparing their electricity usage to that of their peers and providing tips for ways to save. A second 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.
The study found that the households that received informational “nudges” to save reduced their electricity use by 7 percent, and duplicating the effect of the “nudges” would require a tariff increase as high as 12.5 percent. But, contrary to what one might think, when monetary incentives were added, households no longer reduced consumption.
“When money is thrown in to sweeten the deal, households react by asking themselves ‘Why is a utility paying me? What’s in it for them?’ And, is it going to cost me in the end?’” Sudarshan says. “This reflects a distrust that undermines the policy, making this distrust a problem not just for utilities but also for policymakers as they work to create effective policies.”
Ultimately, although informational “nudges” may have significant potential, they come with challenges for policymakers seeking to use them in reliable ways, Sudarshan finds.
“The challenges identified raise important design questions for policymakers moving forward, not just in India but in other developing countries as well, where it is so important to identify approaches that can boost electricity supplies at a time when demand is exponentially rising. These tools are a wonderful opportunity for policymakers, but there is an art to using them effectively.”