Why rental apartments have more inefficient fridges

December 22, 2012

Economists have often puzzled over why more people don't invest in energy-efficiency measures that save money over the long run. If it's really so sensible, shouldn't everyone be doing it?

One explanation is that the incentives at work can sometimes be skewed. Matthew Wald points to a fascinating recent post by Lucas Davis and David Levine of UC Berkeley explaining that people who rent apartments tend to have far fewer energy-efficient appliances than those who own their own homes:

Why would this be? Think about the incentives at work here. For a homeowner, the calculation is fairly straightforward. He or she can spend a bit more money upfront to purchase an efficient refrigerator or dishwasher and enjoy slightly lower electricity bills over time. As the graph shows, many homeowners are happy to make that trade (though not all of them).

Things are different in a rental unit. The landlord is usually the one purchasing the appliance. But the tenant is paying the electricity bills. That means landlords don't have nearly as much incentive to buy, say, an Energy Star fridge or dishwasher. True, the landlord could buy the costlier appliances and charge higher rent. But as Levine notes, potential renters are less likely to pay higher rents for energy efficiency because they don't have solid information about how it will translate into lower bills. 

As a result, a 2010 paper (pdf) by Davis found that rented apartments have about half as many Energy Star appliances as homes do. That's true even if you control for income, demographics, energy prices and weather. (Notably, when the landlord is paying utility bills, the appliances tend to be much more efficient.) There's decent evidence that a market failure is at work here.

So what's the answer? Levine suggests that cities and states could require rental units to provide basic information about energy. A report card that looks something like: "This apartment unit has expected gas and electricity costs of $123 per month, assuming average usage. That utility bill is higher than 67 percent of apartments this size, meaning most apartments this size have lower expected energy costs.”

Of course, fixing this market failure wouldn't have a massive impact on U.S. energy use  — it would probably cut U.S. electricity consumption by just 0.5 percent. (As Wald notes, Energy Star appliances do have problems, though they do tend to reduce consumption by about 10 to 30 percent.) Still, the broader research into why energy efficiency measures aren't always adopted is a fascinating one — and, potentially, an important one.

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Sarah Kliff · December 21, 2012