On consumer incentives for energy-efficient durables

Environmental policies often regulate energy-using durable goods rather than targeting externalities directly. How should such indirect policies be set? In this paper, we model the impact of efficiency incentives (EIs) on consumer behavior and analyze the normative implications of these policies in settings with internalities and externalities. We elucidate how the conditionally-optimal EI depends upon key empirical values and we also demonstrate how EIs can be paired with auxiliary policies to achieve optimality across various settings. Our analysis pinpoints the importance of the rebound effect in determining the net impact of the EI on externalities. Thus, our theoretical exposition provides concrete guidance for policy makers and program managers seeking to implement such policies. We further elucidate these theoretical insights through two empirical examples pertaining to air conditioner and refrigerator replacements.