Energy Efficiency and the Principal-Agent Problem

"The biggest challenge is not inventing new technology but persuading more people to adopt technology and practices that already exist," writes Dan Charles in the Science article "Leaping the Efficiency Gap." (Subscription article; free podcast.)

Reviewing the mix of persuasion, regulation, and taxation aimed at promoting adoption of energy efficiencies, he emphasizes the need to address the principal-agent problem.

Much has been written about market failures, with little demonstrated success in overcoming them. A prime offender is the "principal-agent problem," which occurs when someone gets to spend another person's money. Hotel guests, for instance, can waste hot water because they don't pay for it. Landlords buy cheap, inefficient appliances because their tenants pay the utility bills. ...

There are ways to solve it, he [Alan Meier] says. In Japan, companies that deliver a vending machine to a site also pay for the electricity that the vending machine consumes. Not surprisingly, those companies now use more energy-efficient vending machines.

From the 2007 International Energy Agency publication, Mind the Gap- Quantifying Principal-Agent Problems in Energy Efficiency:

This book provides a unique insight into barriers to energy efficiency. It provides a methodology and a first attempt at quantifying the size of one type of barrier to energy efficiency: Principle-Agent (PA) problems. PA problems refer to the potential difficulties that arise when two parties engaged in a contract have different goals and different levels of information.

Overall, the study finds significant evidence of PA problems — ranging from around 30% of sectoral energy use to negligible effect in the various sectors studied. ... While PA problems affect little amounts of energy use at the individual level, whether landlord tenants or in vending machines, when aggregated, the problem is significant.