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—high borrowing costs or a lack of access to credit—hinder consumers’ ability to make energy efficiency investments. While credit constraints often refer to a consumer’s access to credit (i.e., the extensive margin), they can also related to a consumer’s financing costs conditional on being approved for a loan (i.e., the intensive margin). This paper studies the intensive margin of credit constraints and provides the first direct evidence of the relationship between consumers’ cost of credit 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 $97 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 for durable goods in the U.S.
with Benjamin Leard
Vehicle leasing involves a consumer renting a car for an average of three years. Given the typical lease length, we show that estimating valuation of leased vehicle fuel costs is fundamentally different from estimating valuation of purchased vehicle fuel costs. We find that new vehicle lessees and buyers both undervalue lifetime fuel costs. But because leasing periods last about three years, new vehicle lessees fully value lease-specific fuel costs. Our estimates also imply that leasing companies set residual values, defined as the post-lease expected value of the vehicle, with the expectation that used vehicle buyers undervalue post-lease fuel costs.
Work in Progress
Should electric vehicle purchase subsidies be linked with scrappage requirements?
with Benjamin Leard
Non-Peer Reviewed Publications
with Benjamin Leard, Joshua Linn, and Virginia McConnell
Resources For the Future's Common Resources Blog, September 22, 2021