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Making the implicit explicit: A look inside the implicit discount rate

: Schleich, Joachim; Gassmann, Xavier; Faure, Corinne; Meissner, Thomas

Fulltext urn:nbn:de:0011-n-4040318 (332 KByte PDF)
MD5 Fingerprint: 5ddcd4cfed4f95f744d08936fcaa01fc
Created on: 19.7.2016

Karlsruhe: Fraunhofer ISI, 2016, 37 pp.
Working Paper Sustainability and Innovation, S 04/2016
Report, Electronic Publication
Fraunhofer ISI ()
energy efficiency; energy system modeling; implicit discount rate; energy policy; behavioral economics

Implicit discount rates (IDRs) are employed in energy models to capture household investment decisions, yet the factors behind the IDR and their respective implications for policy-making usually remain blurred and fractional. The proposed comprehensive framework distinguishes three broad categories of factors underlying the IDR for household adoption of energy-efficient technologies (EETs): preferences (notably over time, risk, loss, debt, and the environment), predictable (ir)rational behavior (bounded rationality, rational inattention, behavioral biases), and external barriers to energy efficiency. Existing empirical findings suggest that the factors underlying the IDRs that differ across household characteristics and technologies should be accounted for in energy models. Furthermore, the framework allows for a fresh look at the interplay of IDRs and policies. We argue that a simple observation of high IDRs (or observing correlations between IDRs and socio-economic characteristics) does not provide guidance for policy-making since the underlying sources cannot be identified. Instead, we propose that some of the factors underlying the IDR - notably external barriers - can be changed (through directed policy interventions) where as other factors - not ably preferences and predictable (ir)rational behavior - are innate and can only be taken into account (through reactive policy interventions).