۱- Introduction

۲- EU energy labels for cars and supplementary policies

۳- Energy efficiency in the Spanish car market

۴- Relative vs. absolute labelling

۵- Estimation of price elasticities of demand

۶- Results

۷- Conclusions and policy implications

References

Abstract

Improved energy efficiency can help reduce pollution, contribute to energy security, and help consumers save money. This paper explores energy labelling schemes as a policy instrument for promoting energy-efficient cars in Spain. Specifically, it explores consumer responses to changes in vehicle prices. We derive the demand responses for two different efficiency labelling schemes: absolute and relative. To that end, we calculate own- and cross-price elasticities of demand for cars with efficiency labels on the Spanish car market. The results show that the elasticities for more efficient cars are in general higher. However, in the specific case of sedans, the elasticities depend on assumptions about how consumers decide which car to purchase. If consumers are concerned about the absolute energy performance of cars independently of other attributes, and thus pay attention to absolute labelling, demand for more efficient cars is more elastic than demand for less efficient cars. If consumers choose the car segment first and then the energy performance, using the relative label, the opposite result is found. The results suggest that both relative and absolute labelling schemes can be useful, depending on how consumers make their decisions. It might also be possible to design a mixed system.

Introduction

A wide array of international research assessments, market analyses, institutions and politicians expect improved energy efficiency to deliver greenhouse gas emission reductions, reduced local air pollution, jobs, growth, increased energy security and large financial savings for households, companies and governments. Energy efficiency can unquestionably generate multiple socioeconomic benefits (Ryan and Campbel, 2012). If the goal of limiting global warming to well-below 2 �C, as agreed in the Paris Agreement1 by the parties to the United Framework Convention on Climate Change (UNFCCC), is to be achieved, the IPCC (2014) envisages investments of as much as US$336 billion over the next two decades in energy efficiency in housing, industry and transportation. Transportation is one of the sectors where improved energy efficiency is expected to play a key role in meeting climate, environmental, energy and social policy goals. The Fifth Assessment Report of the IPCC finds that “energy efficiency measures through improved vehicle and engine designs have the largest potential for emission reductions in the short term” (Edenhofer et al., 2014). Investments in energy-efficient goods are lower than expected in light of the potential financial savings that could be made by purchasing more efficient goods (Jaffe et al., 2009; Kounetas and Tsekouras, 2008). This is known as the “energy efficiency paradox”. There are many factors that contribute to explaining this phenomenon, such as asymmetric or insufficient information, lack of access to capital, differences between private and social discount rates, principal-agent issues that lead to maximising short-term profit rather than long-term strategic decisions, uncertainty regarding savings compared to certainty regarding costs, and the irreversible nature of the investment required (Abadie and Galarraga, 2012).