Willingness-to-Pay for Energy Conservation and Free-Ridership on Subsidization – Evidence from Germany



1 Introduction

Home renovation is generally asserted to be a highly effective means for house-
holds to lower expenditures on energy through increased efficiency. From a public
policy perspective, energy efficiency in the residential sector confers the additional
benefit of reducing reliance on fossil fuels, thereby contributing to both energy
security and environmental stewardship. In Germany, as in other industrialized
countries, the residential sector accounts for upwards of 30% of energy end use,
the overwhelming share of which is consumed for space heating and hot water
preparation. Consequently, the improvement of home insulation and heating
equipment in the existing building stock, which directly impacts the energy re-
quired for heating services, is seen to afford considerable scope for reducing the
country’s energy consumption.

Over the past decade, the German government has implemented several finan-
cial support programs to encourage such retrofitting activities. Homeowners have
received access to low-interest loans and - in a recently launched program initiated
in 2007 - can alternatively apply for grants. An important question in gauging
the policy merits of such measures concerns the homeowner’s willingness-to-pay
(WTP) for the energy savings that accrue through renovations. Given this infor-
mation, one can analyze whether and to what extent the subsidization program
suffers from free rider effects. Free ridership occurs if the subsidized household
would have undertaken the energy-conserving activity even in the absence of the
subsidy, that is, if the household’s WTP exceeds cost (Train 1994). Despite its
relevance to the assessment of publicly-financed programs, WTP estimates for
energy-savings and the associated implications for free-ridership have received
scant scrutiny to date.

The purpose of the present study is twofold. First, we estimate the determi-
nants of home retrofits and derive therefrom estimates of the marginal WTP for
energy savings. Second, we assess the extent to which free rider effects threaten



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