Do Credit Constraints Explain the Energy Efficiency Gap? Evidence from the U.S. New Vehicle Market

The “energy efficiency gap” is a puzzle characterized by consumer under-investment in energy efficient products (e.g., hybrid vehicles), whose higher upfront cost is offset by future energy savings. One common but empirically unsubstantiated explanation for the gap is that credit constraints – prohibitively high borrowing costs or a lack of access to credit – hinder consumers’ ability to make energy efficiency investments. This paper provides the first direct evidence of the relationship between credit constraints and fuel economy demand in the U.S. new vehicle market. On average, increasing a consumer’s auto loan interest rate from 2% to 5% APR is associated with a 0.09 MPG decrease in purchased fuel economy. For a typical auto loan, this corresponds to $2,313 in additional interest paid, but only $86 in lifetime fuel cost savings lost. This disparity calls into question the suggestion that credit constraints are a meaningful contributor to the energy efficiency gap. Classification-D12, Q58