How relevant are free-rider effects for target achievement?. Updated version
Paper presented at IEPPEC - International Energy Policy & Programme Evaluation Conference, June 25 - 27, 2018, Vienna, Austria
To reach energy savings or greenhouse gas emission targets, energy efficiency measures that are often initiated and subsidised by governments are commonly applied. Results presented in empirical papers support the assumption that measures such as subsidized loans or grants induce the use and diffusion of energy efficient technologies. However, governments have limited budgets and thus try to use their scarce financial means as efficiently as possible: They strive to achieve energy savings goals by least costs. However, many efficiency policies are confronted with moral hazard problems, free riding, rebound effects and others. This paper discusses to what extent free riding is a problem when designing energy efficiency measures. And it debates how relevant it is for achieving the emission target. For this, the paper reviews about 50 evaluation papers addressing moral hazard and free riding problems of energy efficiency measures, compares their findings and contrasts them with different approaches assessing energy savings as well as with the different types of support measures. The results of the literature analysis show that those investors that do free-ride contribute a large share to energy savings. However, those efficiency gains are partially offset by rebound effects. Therefore, free-riding is not a problem with respect to target achievement, but a problem of cost effectiveness, while rebound effects are endangering the energy savings and emission goals. Further, we argue that free-riding is rather independent of the type of policy support, even though it is often related to public expenditures. In contrast, it depends on the ambition level of the measure. Many energy efficiency measures with low public expenditures either entail higher private expenditures or go hand in hand with a lower diffusion of efficiency technologies while increasing public expenditures increases the likelihood of free-riding. Thus, we argue that there is a trade-off between free-riding, public and private expenditures. Finally, free-riding matters with respect to cost effectiveness but not regarding target achievement.