IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change

6.7.2 Misplaced incentives

Misplaced incentives, or the agent-principal barrier takes place when intermediaries are involved in decisions to purchase energy-saving technologies, or agents responsible for investment decisions are different from those benefiting from the energy savings, for instance due to fragmented institutional organizational structures. This limits the consumer’s role and often leads to an under-emphasis on investments in energy efficiency. For example, in residential buildings, landlords often provide the AC equipment and major appliances and decide on building renovation, while the tenant pays the energy bill. As a result, the landlord is not likely to invest in energy efficiency, since he or she is not the one rewarded for the investment (Scott, 1997; Schleich and Gruber, 2007). Decisions about the energy features of a building (e.g., whether to install high-efficiency windows or lighting) are often made by agents not responsible for the energy bills or not using the equipment, divorcing the interests of the builder/investor and the occupant. For example, in many countries the energy bills of hospitals are paid from central public funds while investment expenditures must come either from the institution itself or from the local government (Rezessy et al., 2006). Finally, the prevailing selection criteria and fee structures for building designers may emphasize initial costs over life-cycle costs, hindering energy-efficiency considerations (Lovins, 1992; Jones et al., 2002).

6.7.3 Energy subsidies, non-payment and theft

In many countries, electricity historically has been subsidized to residential customers (and sometimes to commercial or government customers as well), creating a disincentive for energy efficiency. This is particularly the case in many developing countries and historically in Eastern Europe and the former Soviet Union – for example widespread fuel poverty in Russia has driven the government to subsidize energy costs (Gritsevich, 2000). Energy pricing that does not reflect the long-term marginal costs of energy, including direct subsidies to some customers, hinders the penetration of efficient technologies (Alam et al., 1998).

However, the abrupt lifting of historically prevailing subsidies may also have adverse effects. After major tariff increases, non-payment has been reported to be a serious issue in some countries. In the late 1990s, energy bill collection rates in Albania, Armenia and Georgia were around 60% of billings. Besides non-payment, electricity theft has been occurring on a large scale in many countries – estimates show that distribution losses due to theft are as high as 50% in some states in India (New Delhi, Orissa and Jammu-Kashmir) (EIA (Energy Information Administration), 2004). Even in the United States, it has been estimated to cost utilities billions of dollars each year (Suriyamongkol, 2002). The failure of recipients to pay in full for energy services tends to induce waste and discourage energy efficiency.