Tagging and Targeting of Energy Efficiency Subsidies

Corrective taxation is a common approach to addressing externalities, internalities, and other market distortions. These distortions are often heterogeneous: for example, some cars pollute more than others, and many people consume alcohol “rationally’’ even as present biased individuals might over-consume. Such heterogeneity raises the question of whether a corrective tax is “well-targeted’’: does it primarily affect individuals subject to relatively large distortions? A tax set at the average level of the distortion could actually reduce welfare if the marginal individuals were already making relatively undistorted decisions. This paper studies the targeting of corrective subsidies for energy efficient durable goods such as air conditioners, insulation, and cars. These subsidies are justified by multiple distortions, primarily including environmental externalities, credit constraints, “landlord-tenant’’ information asymmetries, imperfect information, and “behavioral’’ biases such as inattention to energy costs (Allcott and Greenstone 2012; Gillingham, Newell, and Palmer 2009). We first argue that these distortions are heterogeneous on observables: wealthy people are less credit constrained, homeowners are unaffected by the “landlord-tenant’’ problem, and we show empirically that environmentalists are more attentive to energy costs and believe that energy efficient goods save more money. We then show that Tagging and Targeting of Energy Efficiency Subsidies†