Energy Efficiency, the Free Market and Rationales for Government Intervention

This paper reviews current perspectives on market barriers to energy efficiency. We find that challenges to the existence of market barriers have, for the most part, failed to provide a testable alternative explanation for evidence suggesting that there is a substantial "efficiency gap" between consumers' actual investments in energy efficiency and those that appear to be in consumers' best interest. We suggest that differences of opinion about the appropriateness of public policies stem not from disputes about whether market barriers exist, but from different perceptions of the magnitude of the barriers, and the efficacy and (possibly unintended) consequences of policies designed to overcome them. We conclude that there are compelling justifications for future energy-efficiency policies. Nevertheless, in order to succeed, they must be based on a sound understanding of the market imperfections they seek to correct and a realistic assessment of their likely efficacy.