Comparing Subsidies, Loans, and Standards for Improving Home Energy Efficiency

Margaret Walls
Resources for the Future

Residential buildings use approximately 20 percent of the total U.S. energy consumption, and single-family homes alone account for about 16 percent. Older homes are less energy efficient than newer ones, and, although many experts have identified upgrades and improvements that can yield significant energy savings at relatively low costs, it has proven to be difficult to spur most homeowners into making these investments. In this article, I analyze the energy and carbon dioxide (CO2 ) effects from three policies aimed at improving home energy efficiency: (1) a subsidy for the purchase of efficient space heating, cooling, and water-heating equipment; (2) a loan for the same purchases; and (3) efficiency standards for such equipment. I use a version of the U.S. Department of Energy (DOE), Energy Information Administration’s (EIA’s) National Energy Modeling System, NEMS-RFF, to compute the energy and CO2 effects and standard formulas in economics to calculate the welfare costs of the policies. I find that the loan option is quite cost effective but provides only a very small reduction in CO2 emissions and energy use. The subsidy and the standards both are more costly but generate CO2 emissions reductions seven times greater than the loan option. The subsidy promotes consumer adoption of very high-efficiency equipment, but the standards do not; they lead to purchases of equipment that just reaches the standards. The discount rate used to discount energy savings from the policies has a large effect on the welfare cost estimates.