Consumers’ Response to State Energy Efficient Appliance Rebate Programs

February 21, 2018 • Research Briefs in Economic Policy No. 101
By Sébastien Houde and Joseph Aldy

Over the past 40 years, policymakers have implemented an array of instruments—regulatory mandates, information campaigns, and technology subsidies—to promote energy efficiency. For energy‐​consuming durables, it is quite common that an individual consumer purchases a product designed under an energy efficiency standard, marketed subject to government‐​required information disclosure, and eligible for a subsidy. For example, an individual who bought a Chevrolet Volt in 2017 contributed to General Motors’ compliance with Department of Transportation Corporate Average Fuel Economy standards, likely learned of the fuel savings of the plug‐​in hybrid from the vehicle’s Environmental Protection Agency fuel economy label, and benefitted from a federal tax credit administered by the Internal Revenue Service. Likewise, large appliances are subject to federal minimum energy efficiency standards, information disclosure on typical annual energy usage, and occasionally various kinds of local, state, and federal rebates and tax credits. Given scarce resources and the existing overlay of policy instruments, what is the incremental effect of energy efficiency subsidies on energy outcomes?

To address this question, we evaluate the State Energy Efficient Appliance Rebate Program (SEEARP), commonly referred to as “Cash for Appliances” (C4A). As a part of a suite of programs funded through the 2009 Recovery Act aimed at promoting investment in energy‐​efficient durables and equipment, state governments received $300 million to subsidize the purchase of energy‐​efficient residential appliances. A consumer could claim a rebate under a state’s C4A program if he or she purchased an appliance with an ENERGYSTAR (ES) rating—one of the federal government’s information programs for appliances that assigns a label to appliances that meet specific energy efficiency requirements. The states had considerable discretion in the design and implementation of their C4A programs, a policy that resulted in significant heterogeneity across the country in the timing, subsidy amount, and appliance category eligibility.

Using transaction‐​level data from a large national retailer, we estimate the effect of C4A rebates on the sales of refrigerators, clothes washers, and dishwashers. We find that state C4A programs increased appliance sales 7 to 10 percent during the rebate period for these three appliance categories.

The market share of ES‐​rated appliances—those eligiblefor the rebates—increased 1 to 2 percent during the rebateperiod. A 2 percent increase in the ES share of the refrigeratormarket during the rebate period, however, resulted in astatistically significant but economically minuscule effect onrefrigerator energy efficiency. Consumers claiming rebatesfor refrigerator purchases through the state C4A programscould expect to consume about 2 kilowatt‐​hours less per year,depending on appliance energy efficiency ratings.

We quantify the behavioral response to rebates alongthree dimensions: (1) substitution from ineligible productstoward eligible products, (2) intertemporal substitution,and (3) upgrading toward higher‐​quality products. We findthat about 70 percent of consumers who claimed a rebatewould have bought an ES‐​rated appliance during the periodof the C4A program in the absence of the rebates. An additional15 percent to 20 percent of consumers changed thetiming of their purchase of an ES‐​rated appliance by a fewweeks. Expanding our analysis from the rebate period to alsoinclude each of the three months before and after the rebateperiod results in zero impacts for sales, ENERGYSTARmarket share, and appliance energy efficiency. Altogether,about 90 percent of consumers who claimed a rebate donot contribute to an improvement in the energy efficiencyof purchased appliances. Our finding on the importance ofintertemporal substitution for energy‐​consuming durables isconsistent with the research on the Cash for Clunkers program.Other research has found significant intertemporalshifting under Cash for Clunkers: a large share of programparticipants moved forward their car purchase decision bya few months. Likewise, research has shown that consumersshifted the timing of the purchase of the Toyota Prius tomaximize their tax benefits.

We also find that rebates led consumers to upgradetoward higher‐​quality, but less energy‐​efficient models.Upgrading reflects the focus of the rebate programs on EScertification. Specifically, the ES certification requirement isa function of minimum efficiency standards for appliances,which are less stringent for larger appliances (and can be lessstringent depending on other valued appliance attributes).For example, a large refrigerator with a given level of energyefficiency could qualify for the ES label, but a smaller refrigeratorwith the same level of energy efficiency might not.We show that holding utilization constant, the interactionbetween subsidies and minimum energy efficiency standardsresults in a particular case of attribute‐​based regulationthat induces perverse upgrading. Finally, we also find someevidence that the generous rebates may have induced anincome effect that led consumers to upgrade toward higherquality,but larger‐​size models.

The design and implementation of the C4A programfacilitate our empirical analysis. First, the federal governmentallocated funds to the states on a per capita basis; thus the“size” of this stimulus program, at the state level, is exogenousof the state’s economic condition in 2009 and 2010. Second,the state discretion in program design resulted in significantheterogeneity in terms of start dates, eligible appliance categories,rebate amounts, and other characteristics.

As a part of the 2009 Recovery Act, C4A had dualpurposes: stimulating economic activity and improving theenergy efficiency of purchased appliances. The C4A programwas a relatively small fraction of Recovery Act spending (lessthan 1/20 of 1 percent), which precludes direct statisticalanalysis of its effect on economic activity. While transferringapproximately $300 million to households contributedto the overall economic stimulus effort, the disbursementwas not necessarily quick by Recovery Act standards: onlyone state distributed rebates in 2009. Moreover, the highfreeriding rate suggests little opportunity for leveraging privateinvestment, an important effect of other Recovery Actenergy programs.

Our findings offer a cautionary tale to federal, state, andlocal program managers designing energy efficiency programsto promote cost‐​effectiveness and maximize their netsocial benefit. We show that for C4A, the cost per kilowatthoursaved is on the order of about $0.21 to $1.10, dependingon assumptions and appliance category. The low end of thisrange is four times the average cost per unit of energy savedby utility‐​sponsored energy efficiency programs.

This research brief is based on Sébastien Houde and Joseph E. Aldy, “Consumers’ Response to State Energy Efficient ApplianceRebate Programs,” American Economic Journal—Economic Journal 9, no. 4 (November 2017): 227–55.

About the Authors
Sébastien Houde
Joseph Aldy