Why Energy Efficiency Does Not Pay - Split Incentives

Energy efficiency is the most cost-effective way to address climate change and energy security concerns. Efficiency presents a unique opportunity because not only does it save energy, it reduces costs and lowers CO2 emissions. But unfortunately many opportunities for energy efficiency improvements are wasted because of split incentives. Often the consequences and benefits of energy choices do not affect those making the choices.

I've already addressed how sub-metering can encourage tenants to be more energy efficient. In apartment houses that are sub-metered the resident who leaves his air conditioner on all day pays more for electricity than the one who conserves energy whenever possible. And when commercial buildings are sub-metered a tenant who invests in energy efficient lighting, equipment and practices pays less for electricity than the energy hog in an adjoining space.

A property developer or building owner may be unwilling to pay any incremental cost for energy-efficient equipment and appliances because the building occupants will be paying the electric bills.

Split incentives are particularly challenging in commercial real estate. Most leases enable owners to buy bulk energy and charge tenants a higher rate than they pay, so they profit from energy use rather than from energy efficiency. Leases normally do not allow owners to assess tenants for capital improvements that would save energy and save the tenants quite a bit of money. To add to the owner's dilemma, mortgage terms often restrict the ability to finance capital improvements.

The significant obstacles outlined above can be overcome. Solving such a complex problem requires legal and financial expertise and the ability to think outside the box.