Consumers’ Willingness to Pay for Climate Change

Consumers’ Willingness to Pay for Climate Change Final Report Fiona Oliver Danja van der Veldt

Consumers Council of Canada March, 2004

Prepared by:

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Table of Contents Acknowledgements ......................................................................................3 Executive Summary .....................................................................................4 Section 1.0 Introduction................................................................................9 1.1 CLIMATE CHANGE ............................................................................................................................... 9 1.2 CANADA’S ROLE IN CLIMATE CHANGE ............................................................................................ 10 1.3. WILLINGNESS TO IMPLEMENT ACTIONS TO REDUCE CO2 EMISSIONS ............................................ 11 1.4 METHODOLOGY ................................................................................................................................ 12 1.5 SUMMARY .......................................................................................................................................... 12

Section 2.0 Consumers Willingness to Pay ................................................13 2.1 CALCULATING WILLINGNESS TO PAY ............................................................................................... 13 2.2 DATA ................................................................................................................................................. 14 2.3 HURDLE RATES AND THEIR EFFECT ON PURCHASING ENERGY EFFICIENT PRODUCTS .................. 17 2.4 RESULTS ANALYSIS ........................................................................................................................... 18 2.5 ANALYSIS SUMMARY ........................................................................................................................ 30

Section 3.0 Conclusion...............................................................................33 Section 4.0 Recommendations...................................................................38 Section 6.0 Personal Communication ........................................................42 Appendix One - Research Phase I............................................................43 Appendix Two – Research Phase II...........................................................69 Appendix Three -Research Phase III .........................................................93 Appendix Four – Notes on Market Share Data ........................................110

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Acknowledgements The Consumers’ Willingness to Pay for Climate Change report was prepared by the Summerhill Group on behalf of the Consumers Council of Canada. The Consumers Council of Canada would like to extend our appreciation to Industry Canada for providing funding and support for the development of this report. The authors, Fiona Oliver and Danja Van der Veldt would also like to thank Ian Morton, Melissa Felder and Lenard Hart who invested invaluable insight, time and energy into the content and editing of this report. In addition, the authors would also like to thank the report’s Advisory Board, in particular Wilf McOstrich and Patricia Jensen, for their guidance and involvement throughout the process. The companies, and individuals, that produced the three phases of research should also be recognized and thanked for their substantial contributions: Phase One – Literature Review and Elasticity of Demand Research – Van der Veldt Consulting (Danja Van der Veldt) Phase Two – Focus Group Session Research – PIN Network (Peta Lomberg) Phase Three – In-Field Survey Research – Cullbridge Marketing (Jay Kassirer)

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Executive Summary To counter the negative impacts of greenhouse gases (such as CO2) on the global climate, most of the world’s leading emitters met in 2001 to negotiate the Kyoto Protocol. 193 signatory countries1, including Canada, have committed to reduce their CO2 emissions, by 8% from 1990 levels by the time frame 2008 to 2012. Since consumers produce emissions that lead to climate change, they are being asked to contribute to the solution. The Action Plan on Kyoto (Climate Change Plan for Canada - Achieving Our Commitments Together (2002)), was finalized in 2002 and challenges all Canadians to reduce individual CO2 emissions by one tonne per year. Individual CO2 emission reduction will be achieved through a change in behaviour and habits (eg. driving less, reducing the amount of hot water used), and through a change in purchasing patterns (eg. buying more efficient appliances). Since many energy efficient products are priced at a premium relative to less efficient products, there is a need to understand if consumers are willing to pay for their purchase. This report of the Consumers Council of Canada (CCC) examines consumer’s willingness to pay higher prices for climate change friendly products. The preparation of this report supports CCC’s commitment to act as a willing partner and advisor on important national issues such as climate change. In order to effectively remove market barriers and motivate consumers to buy products that are more climate change friendly, four major conclusions have been developed. These conclusions are tools and approaches to reduce some of the barriers that prevent Canadian consumers from taking personal responsibility for their buying decisions that affect climate change. In addition these conclusions will drive the report’s final recommendations.

1. Consumers are primarily interested in price and are not prepared to pay for environmental benefits that may affect climate. In the focus group work, five out of six chose the lowest cost air conditioner when given a choice between three different units with three different EER ratings. The $25 annual operating savings was not worth the initial cost price premium of $200 for the higher rated EER model. This shows that the consumers did 1

http://unfccc.int/resource/conv/ratlist.pdf

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not see the value of buying the more energy efficient product given that the operational savings were not seen as significant relative to the price premium. The value of the higher EER rated unit (the most expensive unit) was inconsequential in their decision. Only price really mattered. 2. Consumers do not know about Canada’s Climate Change Plan or the One-Tonne Challenge. Of surveyed Canadians, the majority (75.1%) indicated they were “not familiar” or were “somewhat” familiar with the government’s Climate Change Plan. Furthermore, the research shows that most Canadian consumers do not understand that there are targets of CO2 emission reductions that must be met to address climate change. If consumers don’t understand why they are paying for climate change, or what products are more climate change friendly, it is highly doubtful they will value those items or the issue at a premium. In the survey data, there was a correlation made between those who said that “yes”, they were familiar with the government of Canada’s Climate Change Plan and those who were willing to pay a higher premium for green power. This proves that those who understand the issue and what the government wants Canadians to do about it, are more willing to pay for climate change.

3. Increased variety and type of financial incentives and policy options should be reviewed to increase market share of energy efficient products. Financial instruments, in particular rebates and free product, should be considered to increase the market share of energy efficient products. According to this report’s research rebates were the most impactful market-based incentive, followed by free product. Three out of four (72%) of the national survey respondents claimed they would be motivated to buy energy efficient products over less efficient and lower cost alternative as a result of rebates. Point of purchase rebates versus mail-in rebates were seen as particularly motivating for consumers. Free product was the second most prized market-based incentive by consumers. Two out of every three (66%) of surveyed consumers said that free product is a “prime driver” for purchasing climate change friendly products. Women were particularly influenced by free product with 76% saying that free product would influence them substantially on their buying decision. Policy instruments need to be considered by government to help further drive consumers to make efficient product purchasing choices. For example, one policy option might be the application of a targeted tax refund, like the recent Ontario rebate on the purchase of ENERGY STAR® qualified appliances. Another option could involve the use of incentives on the public’s income tax when they make more climate

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change friendly product purchases. Another option still is the strategic use of regulated codes and standards. Regulations on codes and standards need to be strategically implemented when the market has shown significant advancement through voluntary initiatives (eg. incentives and promotions). Moreover, codes and standards can be applied to support the changes happening in the market place. “Market transformation initiatives can advance technologies to the point where codes and standards are not controversial. By working in tandem, voluntary market transformation initiatives and mandatory codes and standards can achieve greater saving than either approach can achieve alone.” (ACEEE 2003) 4. Canadian companies and citizens need to have increased access to market information (eg. market share) for energy efficient or environmentally friendly products. 1. Improved measurement and tracking of market share for energy efficient or green product categories are necessary in Canada. It is imperative to know the baseline so that successful energy efficient policies and initiatives can be measured and supported. For example, whereas data on ENERGY STAR® market penetration figures were available in the US, none were available in Canada. In Canada, only large companies have the financial resources available to collect the necessary market information. Partnerships with retailers and manufacturers could play a role in increasing the availability and decreasing the cost to the federal government of collecting necessary market information. 2. The end consumer needs to be aware of more climate change friendly product options and understand the benefits of buying those particular products over others. As it was proven in the infield surveys consumers who are aware of the issue of climate change are more likely to pay premium pricing for products which they see as solutions. However, promotion (i.e. advertising, education) of energy efficient (and, therefore, climate change friendly) products should emphasize the full range of benefits of a product, not just energy savings in order to be successful2.

As is outlined in a market

transformation study done by the American Council for an Energy-Efficient Economy, and also discussed in the previous work on mobilizing the public around climate change done by the Consumers Council of Canada, the most successful market transformation initiatives are multi-

2

American Council for an Energy-Efficient Economy. Market Transformation: Substantial Progress from a Decade of Work, April 2003, pg. iii.

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pronged including: education, training, incentives and promotion3. It is equally important for retailers and their sales forces to be well educated in ENERGY STAR® and environmentally friendly products if they are to sell them. Industry may need to consider incentives for retailers and sales people also to ensure that they feel the personal urgency to promote more environmentally friendly products.

5.

A consumer perception exists, that industry must take a lead in proving their commitment to climate change.

In the on-line focus group it was clearly stated that consumers must perceive that industry is serious about their own commitment to climate change, and prove that commitment to consumers. For instance, consumers were concerned about paying a premium for products which were more environmentally friendly, unless they knew the premium was justified because of new technology or better materials. They did not want to perceive that they were being unfairly taken advantage of when they chose to buy climate change friendly products. Where a manufacturer’s climate change friendly product option is more expensive than their other product options, there should be every effort on the part of the manufacturer to do one of two things. The first, and more preferable option, would be to develop a well conceived market-based initiative to reduce or eliminate the premium on the more climate change friendly product. The second option, which should occur only if there is not a good solution from option one, or there is a verifiable obvious reason why the consumer should pay more, is an explanation to consumers. If the manufacturer has a reason for which the premium exists, and they will not or can not reduce the premium, that manufacturer must explain the benefits that are directly attributable to the premium. There may be an opportunity for the Consumers Council of Canada to do a follow-up research report investigating best practices in communicating product and climate change benefits to the consumer. The critical differentiator between a successful campaign with consumers reducing their greenhouse gas emissions (GHG) emissions and a non-successful campaign will be directly related to consumers’ willingness to pay (WTP). This means not just what they would hypothetically be willing to pay, but what they will actually pay when they are standing in front of the cash register at their local retailer.

3

American Council for an Energy-Efficient Economy. Market Transformation: Substantial Progress from a Decade of Work, April 2003, pg. iii.

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Report Recommendations The following recommendations were developed as the action-oriented outcomes from the report. They outline three steps that need to take place in 2004 to immediately address products that provide Canadians a way to reduce their CO2 emissions. 1. Commission a report as soon as possible in cooperation with Natural Resources Canada (NRCan) that will establish baseline data in Canada on the market share of energy efficient products. 2. Industry Canada should work with other federal departments including Environment Canada and NRCan to identify and publicize products that offer the largest emission reduction potential aided by the energy efficient product market share data. 3. Industry Canada in coordination with Environment Canada and NRCan should commission a forum in 2004 that would bring together consumer groups, leading program implementers, industry players and key government decision makers to develop integrated market, policy and financial strategies for the products that have been identified with the largest emission reduction potential. •

These strategies should be specific, measurable and action-oriented.

•

They should involve an appropriate mix of public education and outreach, policy instruments and market incentives.

•

Government should not shy away from financial mechanisms and other supportive policy for products that are best in class in terms of energy efficiency.

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Section 1.0 Introduction The Consumers Council of Canada examines through this research paper consumer’s willingness to pay higher prices for environmentally sustainable, specifically climate change friendly, products. Premium prices for environmental products are occasionally more a function of market economies of scale, than of the real added costs of making products that are more sustainable. Generally, consumers’ willingness to pay premiums for climate change friendly products is based upon their concern for the environment and the realization that innovative products often cost more than well established ones. The focus of this study is to give an overview of consumers’ willingness to pay for implementing actions to reduce greenhouse gas emissions. Whether or not consumers are willing to pay to reduce greenhouse gases will depend on the following: •

Their willingness to pay extra for more environmentally friendly goods and services (buying a more fuel efficient car or more fuel efficient refrigerator might be more expensive than buying older more conventional models);

•

Their willingness to change behavior and lifestyles (i.e. reduce vehicle idling, or take public transit instead of driving a car);

•

The extent to which they are encouraged by policy measures to reduce greenhouse gas emissions.

1.1 Climate Change The fact that our planet’s climate is changing can no longer be ignored. Ten of the hottest years on record have occurred in the past 15 years4. Furthermore, average global temperatures have climbed between 0.5 degrees to 1.0 degree C5. This is a cause for concern, as serious climate change can result from even small temperature differences; for example, the difference between today’s average global temperature and the average global temperature during the last Ice Age is only about 5°C6.

4

http://yosemite.epa.gov/oar/globalwarming.nsf/content/climate.html Ibid. 6 http://www.exploratorium.edu/climate/primer/index.html 5

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Rising global temperatures are expected to lead to rising sea level, changes in precipitation and other local climate conditions. Climate change endangers forests, crop yields, and water supplies; and ultimately affects human health, endanger species, and destroys ecosystems7.

1.2 Canada’s Role in Climate Change The phenomenon of climate change is almost certainly human induced as a result of the so called “greenhouse gas” emissions of industrialized society, such as CO2 and HCFCs. To counter the negative impacts of greenhouse gases on the global climate, most of the world’s leading emitters met in 2001 to negotiate the Kyoto Protocol. Now called the Kyoto Accord, 193 signatory countries8, including Canada are committed to its implementation. Signatories have committed to reduce their CO2 emissions, by 8% from 1990 levels by the time frame 2008 to 2012. The Action Plan on Kyoto (Climate Change Plan for Canada - Achieving Our Commitments Together (2002)), was finalized in 2002 and challenges all Canadians to reduce individual CO2 emissions by one tonne per year. This amounts to approximately 20% of current individual emissions9. A communications campaign that presents this emission reduction challenge to Canadians - “One Tonne Challenge” (OTC) - will be delivered early in the 2004 calendar year. Aside from generating public awareness and support for Canada’s commitment to mitigating climate change, individual Canadian citizens should have a clearly defined responsibility to meet the target. Through actions like driving cars, heating homes and using appliances, Canadians are responsible for more than one quarter of Canada’s total greenhouse gas emissions10. On average, each Canadian generates 5.4 tonnes of CO2 per year11. Passenger road transportation results in half of these emissions, energy use for space heating almost a third, and energy use for water heating, appliances, lighting, and space cooling produces the remainder of Canadian individual CO2 emissions (Figure 1). In addition to individual emissions, consumer purchasing decisions also play a significant role in the emissions that manufacturers produce. 7

http://yosemite.epa.gov/oar/globalwarming.nsf/content/impacts.html http://unfccc.int/resource/conv/ratlist.pdf 9 Climate Change Plan for Canada, p.4: http://www.climatechange.gc.ca/plan_for_canada/plan/pdf/full_version.pdf 10 Climate Change Plan for Canada, p.12.: http://www.climatechange.gc.ca/plan_for_canada/plan/pdf/full_version.pdf 11 Ibid., p.45. 8

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Figure 1 - Sources of Canadian individual CO2 emissions Source: Climate Change Plan for Canada, p.45.

Appliances 7.5% Water Heating 11.1% Space Cooling 0.3%

Passenger Road Transportation 49.9%

Space Heating 28.7% Lighting 2.4%

1.3. Willingness to implement actions to reduce CO2 emissions If consumers are to participate in the “One Tonne Challenge” by changing their behaviour and purchasing patterns then they will have to find some motivation to do so. While many Canadians indicate a strong concern for the environment, many are confused about what climate change is, and what the implications of the Kyoto Accord will be on their pocketbook. If consumers feel they can not afford, or are simply not motivated to change their purchasing patterns, little change in behaviour can be expected with respect to their influence on greenhouse gas emissions. On a very basic level, products will or will not be purchased and habits will or will not be changed primarily based on the perceived costs of the environmentally friendly options and individual consumer’s willingness to pay for these options.

While costs are usually fairly fixed by the realities of manufacturing and distribution, there is some flexibility in consumer’s willingness to pay. For this reason, the ability to predict or manage Canada’s capacity to utilize consumer based changes to meet the Kyoto Accord, requires a stronger understanding of consumers’ willingness to pay.

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1.4 Methodology In order to fully investigate consumers’ “willingness to pay” for climate change, the report has engaged in the following research initiatives: •

An analysis of price sensitivity and hurdle rates where possible for particular products or product categories.

•

Focus group work

•

A national in-field survey

The research examines published reports, research papers, focus groups, shopper intercept surveys and industry market share and sales figures (where available). The research team consulted with a variety of experts from industry, government and non-government sectors in Canada and internationally to support the literature review. This report is the result of the integration and analysis of these research initiatives.

1.5 Summary Willingness to pay is quite a different thing than what a consumer chooses to pay when faced with an actual purchase decision. Consumers’ want to see themselves as behaving as they believe they should and so will over report their tendency to participate in energy efficiency practices or their willingness to pay extra for a more environmentally friendly product option. Consumers make choices between products every day based primarily on price. Products that are more sustainable compete against products that are less sustainable. When there is a premium price for the more sustainable, environmentally friendly product, an immediate barrier exists for purchase. These premium priced environmentally preferable products need to have effective market and policy support to ensure they are competitive in the market place. When more energy efficient products are consumed there are net positive benefits for consumers, society and the environment.

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Section 2.0 Consumers Willingness to Pay 2.1 Calculating Willingness to Pay There are several methods used to evaluate willingness to pay. These include: the contingent valuation method, the hedonic method and the travel cost method (see Appendix One for a full evaluation of each method). 1. The contingent valuation method (CVM) asks people directly what they are willing to pay for an environmental benefit, or what they are willing to receive by way of compensation to accept environmental damage (Pearce 1990). A major advantage of the CVM method is that it should, technically, be applicable to all circumstances. This method is primarily the main technique to estimate willingness to pay for environmental issues (Pearce 1990). 2. The hedonic pricing approach uses the variation of property values to estimate the value of local environmental benefits (i.e. the value of a local lake). If higher property values exist due to a local environmental advantage, this information could be used to reflect what people are willing to pay for that environmental benefit (Pearce 1990). 3. The travel cost method attaches an economic value to an environmental site based on the willingness to pay for travel to that particular environmental site. Carr and Mendelsohn, for example, estimate that annual recreational benefits of the Great Barrier Reef in Australia are between USD 700 million to USD 1.6 Billion depending on the definition of travel cost (i.e. actual cost versus travel agent cost) and the functional form used in the model (Carr 2002). For the purposes of this study, the contingent valuation method (CVM) was chosen as it lent itself well to the research parameters. CVM was employed using a focus group, in-field surveys and a literature review of existing contingent valuation method studies. As Van der Veldt notes in the Phase One research, “A drawback of the method is that willingness to pay expressed in a hypothetical market might vary from willingness to pay in an actual market”. In order to address this drawback of CVM, actual market data (i.e. market share) was used where possible to gain an accurate read of consumers’ real willingness to pay.

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2.2 Data There was a large amount of data that was accumulated for this report though each phase of the research. In order to make sense of the data and display it in a way that is more intuitive, a table has been developed (Table 2.1). The table lists the parameters for each research topic, the data points from the literature review indicating what people say they are willing to pay for more sustainable products, the data ascertained through the national in-field survey, and the actual market share figures. In the middle, highlighted column, the gap between the data presented for “What people say they are willing to pay”, and what is actually going on in the market place (illustrated by the in-field survey and actual market share figures) has been identified. The gap is described qualitatively, and is not based on an exact science. It is a tool for the reader to quickly identify areas where there is a large inconsistency between what people hypothetically are willing to pay and what they are actually paying.

Table 2.1 – WTP data point summary and gap analysis Research What people Gap In-field Actual topic and/or say they are between survey Market Share parameter willing to pay hypothetical results figures WTP and (Appendix actual WTP Three) WTP in GDP for CC by 2.5 degrees WTP in $/yr for Kyoto in US WTP in $/yr for Kyoto in Alberta WTP for mortality risk reduction Green Power

.45 to 1.9

N/A

191.70 (mean) 816 (for those educated on Kyoto) $500 or more

Medium

$601/yr (for a 5 in 1000 mortality risk reduction) 37% is willing to pay 10% more for green electricity. Canada 2001. 52 – 95% is willing to pay a modest amount extra per month for green electricity. US 1999 70% willing to pay

N/A N/A

N/A

$50-$100/yr to reduce GHG emissions (Canada) $50-$100/yr to reduce GHG emissions No information

Very large

N/A

Canada – N/A.

Large

N/A N/A

Participation rates in the US as of 2001 are as follows: 1% at over 50% of utilities 3-4% for more ‘successful’ programs 7.4% for one

Consumers’ Willingness to Pay for Climate Change - March 2004

WTP for Green Power in Canada

at least $5/month extra 38% 10/month extra 21% 15/month extra $10/month more for Green Power

program

Large

WTP for Green Power in Waterloo

$10/month more for Green Power (mean)

Large

WTP for Green Power in US

$5/month more 70% $10/month more 38% $15/month more 21%

Large

WTP to implement actions in the home Buy a programmable thermostat

Install high efficiency windows

91% (OTC* Tracking Survey Results “Set back thermostat 39%) 89%

$0-2/month (mean) just over $3/month (average) $0-2/month (mean) just over $3/month (average) $0-2/month (mean) just over $3/month (average)

88% (OTC Tracking Survey Results 8%)

rates for lowest 10 premium pricing was 1.0cent/kWh to 1.92 cents/kWh Same as above.

Same as above.

Same as above.

Large

13.4%

N/A

Large

9.7%

Large

7.1%

No figures for Canada. 43% in NE States and 75% in NW States (2002). Lower figures in Southern states with the exception of Texas which is at 80% penetration of high efficiency windows. Canada – approx 39% in 2000 and up to 49% market share for 2003 (not including December figures).

(OTC Tracking Survey Results 7%)

Replace your old furnace with HighEff

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In the US the market share is approx. 22% (2000 figure). There are 10 states with market share for condensing furnace

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above 60% (in the colder climates). Reduce temp in your hot water tank Caulk Install CFL lights Buy Energy Star appliances

87%

N/A

N/A

N/A

N/A (OTC 5%) N/A (OTC 8%)

N/A

14.8%

N/A

Medium

20%

Small to Medium

10.6%

Market share of CFLs in Canada is 7% (2003) US – Washing Machines 16% Diswashers 30% RACs 25% Fridges 17%

N/A (OTC 6%)

Install Dimmers and Timers Insulation of Basement wall and attic Cleaner Gasoline

EE Cars

N/A

11.1%

Canada – No data is available. N/A

N/A (OTC 7%)

7.4%

N/A

Medium to Large

N/A

10% premium gas purchases 3% Mid level gas purchases 87% Regular gas purchases

TBD

N/A

Car sales data.

37% of Albertans are willing to pay ‘more’ for cleaner gas. Ipsos Reid 2002. 30% of Canadians are willing to pay ‘more’ for cleaner gas. Environics 2001. 40% WTP more for environmentally friendly vehicles. Canada, 2001) In amounts this translated to an avergage of $1820. The range was $50 - $5000.

*OTC = Data taken from Natural Resource Canada and Environment Canada’s One Tonne Challenge Survey – Spring 2004.

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2.3 Hurdle Rates and their effect on purchasing energy efficient products Hurdle rates are calculated as the installed cost (purchase price plus installation) divided by operating cost. Table 2.1 (above), does not include the hurdle rates in its accumulation of data points that were included in the Phase One research (see Appendix One). Hurdle rates available on a variety of appliances from the US are listed in Table 2.2. In addition in Table 2.2, the hurdle rates have been compared directly to the market shares of various appliances from the years 2000, 2001, and 2002. This has been done so that correlations and trends will be apparent. It is predicted that the higher the hurdle rate, the less the investment into energy efficiency, as the purchase price would be relatively high as compared to the operating costs. Logically then, appliances with lower hurdle rates should have the higher market share for the energy efficient products. Table 2.2 illustrates that this assertion may not necessarily be true. NB: The SEER is the Seasonal Energy Efficiency Rating for air conditioners. It is the rating systems the US uses for setting their ENERGY STAR qualification standards. In Canada we use EER, the Energy Efficiency Rating. In simple terms, the higher the SEER rating, the greater the amount of cooling that the system provides for each unit of electricity used. This applies for the EER rating also. The EER rates products from 1 to 11, and the SEER rates products from 1 to 15 or even 16.

Table 2.2 – US Appliance hurdle rates versus market share data Item and Hurdle Rate Residential Windows

2000 Market Share

2001 Market Share

2002 Market Share

(high EE products)

(high EE products)

(high EE products)

N/A

N/A

43% NE states 75% NW states.

Furnaces:

15%

22%

N/A

N/A

(10 states with market share over 60%) Fridge:

19%

N/A

1%

17%

Central AC:

25%

These are EE models

These are EE models

These are EE

available.

available.

models available.

48% (SEER 12)

49% (SEER 12)

52% (SEER 12)

22% (SEER 13)

23% (SEER 13)

28% (SEER 13)

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Freezers:

37%

N/A

N/A

N/A

Gas stove:

42%

N/A

N/A

N/A

Gas dryer:

47%

N/A

N/A

N/A

Gas water heaters: 47%

N/A

N/A

N/A

Electric stove:

N/A

N/A

N/A

N/A

N/A

N/A

N/A Washing Machine 90%* N/A Dishwasher: 111% N/A Room AC: 142% N/A

N/A N/A N/A N/A

N/A 16% 30% 25%

83%

Electric water heaters: 83% Electric Dryer:

90%

* there was no hurdle rate given to the washing machine, but for analysis purposes it was assumed that the hurdle rate would be the same as an electric dryer (90%)

The lack of complete corresponding market penetration figures for the hurdle rates limits the conclusiveness of the research. The data that is available (Table 2.2) seems to contradict the assertion that the higher the hurdle rate, the less investment into energy efficiency. Evidently, there are many more factors that influence the market share other than the hurdle rate. This preliminary analysis indicates that the hurdle rate on its own is not a good indicator of an energy efficient product’s market penetration. One must look at the market, infrastructure, and policy incentives and barriers to gain a more complete picture of the reasons behind an energy efficient product’s penetration figure.

2.4 Results analysis This section provides a review of the most salient findings from the research phases (Table 2.1). Results are reviewed by product category, and also for gaps and opportunities. Willingness to pay (WTP) is for the following product categories; green power, furnaces, household appliances, cars and gasoline. Climate change and greenhouse gas emission reduction potential provided the framework for evaluation of WTP.

2.4.1 Willingness to Pay for Climate Change/Kyoto/GHG emissions reductions There were a variety of different responses as to what people were willing to pay to mitigate climate change broadly or to implement Kyoto or greenhouse gas emission reduction specifically. Responses

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were gathered from both US and Canadian based data, and generally quantified as either a percentage of GDP, an amount per household, and/or as an amount per individual. The WTP for mortality risk reduction was also considered, as according to Krupnick et al. much of the justification for environmental policy making is based on estimates of the benefits to society of reduced mortality rates (Krupnick 2000). The various results from the literature review are listed below in ascending order. For a critique and full discussion around each of the studies, please refer to Appendix One. •

Household willingness to pay $191.70 US per year (Berrens et al., 2003) – US polling

•

Individual willingness to pay $500 CDN per year or more (Ipsos Reid, 2002) – Alberta polling

•

Individual willingness to pay $368 US per year to decrease mortality risk by 1 in 1000 (Krupnick, 2000) – US polling.

•

Individual willingness to pay $601 US per year to decrease mortality risk by 5 in 5000 (Krupnick, 2000) – US polling.

•

Willingness to pay between 0.45 and 1.9 percent of GDP to prevent a climate warming of 2.5 degrees C (MIT, 2000) – US polling.

NB. In Berren’s study (2003), WTP for climate change mitigation increased by more than 400% to $816 US per year per household if respondents perceived the change was positive and as the respondent put in extra effort to learn about global climate change. Since the terms and the reference points for each of the studies documented in the literature review and research (as listed above in point form) were different, the results were normalized to reflect an individual contribution amount. Although the timing and polling geography can not be accounted for, the normalized results as shown in the graph below (Figure 2) help us get an idea of the range of possibilities for the public’s WTP for climate change. The amounts have been kept in their original currency and compared as equals.

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Figure 2 - WTP for Climate Change Data Comparison

Individual WTP in dollars (normalized data)

700

$601.00

600

$500.00

500

$441.60

400

$368.00

300

200

$158.00 $127.80

100

0

Summerhill Group, Berrens et al, 2003 Ipsos Reid, 2002

Krupnick, 2000

Krupnick, 2000

MIT, 1999

2003

Report from which data was obtained

NB. Graph data assumptions. Where figures were in household terms, the amount was divided by 1.5, the assumed number of adults per household based on the US census figure indicating 2.6 people per household. It was assumed that not all of those 2.6 individuals would be adults and it was also assumed that the data shown relative to individual’s willingness to pay, considered only the results of adults. The data point originally in terms of a percentage of US GDP, was calculated based upon an 11,000 billion dollar GDP12, and a US population of 292,696,29013. With regard to consumers’ WTP for climate change mitigation, the different responses illustrate the vagueness of the issue in terms of perception. Market research has indicated that there is simply not enough clarity around the cause and effects of climate change14 (Environment Canada and National Resources Canada, 2003). One might conclude that the average consumer would not understand what paying for climate change might involve.

12

http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm http://www.census.gov/cgi-bin/popclock 14 Natural Resources Canada and Environment Canada, The One Tonne Challenge Tracking Survey – Spring 2003, pg. 1 13

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In reaction to lack of clarity on a question, a consumer may simply choose an answer which he or she perceives as the “norm”. In the case of a survey, this may involve the selection of the middle selection, typically “c”. This way the respondent reasons that he or she is an average, normal person and so would not choose an amount on the top end or the bottom end of a WTP question. This bias was highlighted by a prominent Canadian researcher on willingness to pay for environmental issues, Ian Rowlands15.

2.4.2 WTP for Green Power WTP on green power from the literature review and from in-field surveys produced several data points. They include: •

A national study done by Environics in 2001 which states that 37% of the 1,500 Canadians interviewed (18 years and older) are willing to pay 10% more for green electricity.

•

An “exploratory16” study conducted in Waterloo, Ontario by Rowlands et al. that determined 74% of 466 specially selected Waterloo citizens are willing to pay at $10 or more per month for green power.

•

A US study done by the National Renewable Energy Laboratory of the Department of

Energy of the US Government in 1999 which found that 70% of survey participants from a collection of WTP studies done throughout the US indicate consumers would pay an extra $5 per month for green power. •

In the Canada-wide shopper intercept survey (Appendix Two) almost half (47.3%) of respondents said they would spend $4 or more a month for green power.

The data points of green power research sourced were more homogeneous, relative to the disparity among answers on WTP for climate change. This might be a result of the existence of a baseline value (the current cost of electricity) for calculating a reasonable premium. Also, since the baseline value dictates that the figures are quite small, there is more possibility for the premium to fall within a smaller spectrum 15

Personal communications with Ian Rowlands, October 2003. Rowlands et al suggest that since there were many limitations and the study was only exploratory, conclusions should be seen as preliminary (Rowlands 2003, p. 45). The study is not necessarily representative for other regions, or even the one in which the survey was conducted. Respondents were older than on average in the Waterloo region; respondents were better educated than the average in the Waterloo region; respondents were wealthier and had a relatively higher share of male participants. Moreover, participants were selected based upon an earlier request to indicate their willingness to pay at least CAD $25 for a home energy evaluation, which suggests a special interest in energy issues.

16

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of responses. For example, not many will say that they will pay an extra $100 per month for green power when their current cost of power is only $40 per month currently. A premium of $100 per month just is not reasonable and therefore, not likely. Also there were more consistent terms of reference for the survey questions on green power - most asked consumers how much more they would be willing to pay on top of their monthly energy bills for green power. The study conducted in 1999 by the US National Renewable Energy Laboratory of the Department of Energy compiled a selection of recent market research studies on consumers’ willingness to pay for green electricity and drew the following conclusions (NREL 1999, p. V): •

Customers favour renewable electricity sources, but may know little about them. When more educated about options, customers would be more inclined to be more favourable. The most preferred renewable electricity sources are wind and solar electricity generation.

•

The majority (52% to 95%) of residential customers is willing to pay a modest amount extra per month for renewable electricity. WTP increases when customers are more educated about renewable energy options.

•

WTP extra for green electricity in all studies reviewed followed a predictable pattern (see Table 4). It is likely that any new utility market survey asking residential customers about willingness to pay extra for green electricity will show a similar pattern of results as found in Table 4 (NREL 1999, p. V.). Table 4. Willingness to pay extra for green electricity in the USA. Options for Willingness to pay extra

Results (percentage of people

for green electricity per month

interviewed)

At least US $5 or more

70%

At least US $10 or more

38%

At least US $15 or more

21%

Source: NREL 1999, p. V.

In the USA, electric utilities in 29 states are currently implementing green pricing programs (NREL 2001, p. V). Customer participation rates for green power programs with green pricing have been found to be

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less than 1% for more than 50% of the utility programs. Some of the more successful17 programs have managed to garner customer participation rates between 3% and 4%. Only one program reached a customer participation rate of 7.4% (Moorhead Public Service). Los Angeles Department of Water and Power (LADWP) is the leader in actual customer participation in its green power program, but half of its customers are not paying a higher price for the green power (NREL 2001, p. 14). The higher participation rates for the more successful power programs with green pricing indicate that customers will respond favourably when green pricing programs are well designed and marketed (NREL 2001, p. V.). Only about 12 utilities have been able to develop much more than 2 MW of new capacity as a result of their green pricing program (NREL 2001, p. V). There is no definite link between the amount of the green pricing premium and the participation rate (NREL 2001, p. 10). Green pricing premiums of the top 10 (lowest premium) utilities lie in the range of: 1.0 cent/kWh to 1.92 cents/kWh (NREL 2001, p. 15). Participation rate figures gained from the US show a large gap between people who indicate they have a WTP extra for green power and those who are paying extra. It is more than likely that a similar gap exists between WTP for, and actual participation in green power programs in Canada. I. Rowlands, a Canadian researcher on the area of WTP, indicated that green power WTP studies historically have shown that ‘only a small share of those who say they will pay more actually do so when given the opportunity’ (Rowlands et al., 2000, p. 108). How can this gap be explained? There may be a wide range of reasons for this difference between WTP and commitment to pay. These may include: lack of green product options, lack of awareness of existing green product options as a result of weak marketing and communications efforts, or lack of consumer trust that the premium dollars are actually being put against green energy and its infrastructure. For example, a consumer gives an extra $5 month for green power or the development of green power, but how does that consumer know their money is being utilized for green power as opposed to providing a higher profit margin for the utility? Many of the participants in the focus group indicated some concern about the management of “green power money”, and quibbled about the ability of government or the utilities to use this money effectively.

17

The success of a green pricing program is measured according to the following: 1) the amount of new renewables development fostered by the program, 2) the total number of customer participants, 3) the customer participation rate, and 4) the premium charged to support new renewables development (NREL 2001, p. 13).

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2.4.3 WTP for Residential energy efficiency measures Half of the emissions produced by individuals are done so as a result of residential consumption including: space heating and cooling, water heating, appliances and lighting. Some of those emissions can be addressed through green power options that will result in lower levels or no CO2. However, until green power purchase is commonplace rather than the exception in the market, conservation and energy efficiency are the solution to reach individual emission reductions. There are many ways in which Canadian households can reduce their energy usage. Some recommendations outlined by the Federal Government include18: •

Install a programmable thermostat to automatically change the temperature of your house at night and when no one is at home which can save 0.5 tonnes of CO2

•

Draft-proofing which can save almost 1 tonne of CO2

•

Add insulation to the attic which could save at least one tonne of CO2

•

Install high efficiency windows

•

Reduce the temperature in your hot water tank

•

Improve the insulation in your house

•

Seal and insulate forced air system ducts

•

Lower the thermostat by 2 degrees C.

•

Install a low flow showerhead

Homeowners can save an average of 25 percent per year on their energy bills by implementing the recommendations of the “EnerGuide19 for Houses Evaluation” and can reduce household emissions by more than 2 tonnes per year, depending on the type of home20. The greatest potential for energy savings is in older houses. This can be attributed to the fact that residential building codes have improved over the years and that has resulted in “tighter”, more energy efficient homes. A CREEDAC study that analysed 20,000 homes with regard to EnergyGuide recommendations found out that, even though initial investments are higher in older houses, payback periods are shorter than in newer houses. However, this CREEDAC study also illustrated that most of the people don’t implement the 18

http://www.climatechange.gc.ca/plan_for_canada/challenge/index.html http://oee.nrcan.gc.ca/houses-maisons/ 20 http://www.climatechange.gc.ca/plan_for_canada/tips/index.html 19

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suggested EnerGuide upgrades with a high impact on energy savings. Actual energy efficiency improvement decisions were found to be more based on lower capital investments (with longer payback periods in this case) and on lifestyle choices such as aesthetics (CREEDAC 2001, p. 58-59). In other words, people preferred to undertake energy efficiency improvements that were less economically attractive (longer payback time) than the ones recommended by EnerGuide.

Furnaces Since 28.7% of Canadian CO2 emissions are a result of space heating, the furnace is an obvious place to look for energy efficiency savings. Essentially, there are two types of furnaces in the market currently, condensing and non-condensing. The condensing furnaces have a higher efficiency than do the noncondensing models. Therefore, one way for a household to reduce emissions would be to purchase a condensing furnace. Across Canada, in what is called “demand side management”, programs that work to reduce household energy usage run primarily by utilities, provides rebates on new efficient condensing furnaces are offered to consumers. These programs have been very successful at encouraging consumers to upgrade to energy efficient furnaces (ie. condensing furnaces). This success is reflected in the market share figures from the Canadian Heating and Refrigeration Association Institute that show the increase in penetration of condensing furnaces. In fact, the market share of condensing (efficient) furnaces and non-condensing (less efficient) furnaces are almost equal as of November 2003 in Canada21. Furnaces were one of the items where consumers’ willingness to pay more (88%) for the efficient model, was more closely aligned with the actual market share (56%). The figure obtained through this report’s in-field surveying research (data outlined in Appendix Three) may be a more accurate representation of how many consumers across Canada plan to purchase a condensing furnace in the next year. The survey indicated that 7% of consumers plan to buy a condensing furnace in the next year. Moreover, if those figures accurately reflect true purchase intentions, 2004 market penetration for condensing furnaces may grow by approximately 7%.

21

HRAI market share statistics. November, 2003.

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Appliances Appliances account for 7.5% of total Canadian individual CO2 emissions. In this analysis discussion, we will look at appliances as one product category versus the several specific sub categories. We have included refrigerators, washers and dryers, stoves, and dishwashers in our “appliances” analysis. An Ipsos Reid opinion polling study done in 2002 with a sample of 1,000 Albertans, of 18+ years old, concluded that Albertans are quite willing to make energy efficiency improvements in their homes (Ipsos Reid 2002). However, there were no costs attached to the questions. This Ipsos Reid study also found that Albertans are willing to make ‘one-off changes’, but are less willing to make lifestyle changes. Albertans prefer to make one-time purchases that increase energy efficiency over paying higher prices for energy (Ipsos Reid 2002). See table 5 for more details. This finding bodes well for consumers’ potential willingness to upgrade their appliances to more efficient models. Table 5. Willingness to implement actions to deal with Climate Change in Alberta. Action

Percentage of 1,000 Albertans that are willing to implement the action to deal with Climate Change

Buy a programmable thermostat

91%

Install high efficiency windows in your house

89%

Replace your old furnace with a high efficiency furnace

88%

Reduce the temperature in your hot water tank

87%

Improve the insulation in your house

87%

Buy a smaller or more fuel efficient vehicle

85%

Take public transit to work rather than driving

64% (a national study done by Leger Marketing in the year 2002 found a result of only 20%)

Pay more for household energy cost Pay more for gasoline at the pump

Source: Ipsos Reid 2002.

44% 37% (a national study done by Environics in 2001 found a similar result of 30%)

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When purchasing an appliance, the focus group session (full results may found in Appendix Two) indicated that price was the most important factor in the final decision. This finding is consistent with the Decima Research done for Natural Resources Canada and Environment Canada around OTC that proclaims, “Cost is, in fact, the primary motivation or benefit of reducing energy use in the home (mentioned by 74% of Canadians), compared with environmental (28%) and resource conservation (26%) benefits.”22 This has huge implications on the orientation of market and policy drivers that will motivate consumers to purchase energy efficient appliances or to take part in energy efficiency initiatives. Market and policy drivers must appeal to the consumers’ pocketbook. NB. In the US, there is a market mechanism being practiced by government and industry which encourages the sales of innovative, efficient new products by instigating demand. It is termed “bulk procurement” or “technology procurement”. This market mechanism helps develop a market for a particular product which in turn passes on savings to the consumer produced as a result of a critical mass of demand. It reduces the risk taken by manufacturers on innovative energy efficient new products and encourages investment into research and development. Industry and government in Canada should be looking with great interest at the “bulk procurement” market mechanism for innovative new appliances such as high efficiency apartment refrigerators.

2.4.4 WTP for Cleaner Travel The environmental impacts of vehicle use and gasoline consumption are much more evident than that of energy use in the home to the average consumer23. However, Canadians do not seem to understand, or act upon, energy reducing practices such as checking tire pressure or minimizing idling24. The majority of Canadians do realize that compact vehicles use less fuel and therefore are more environmentally friendly, but regardless of that fact many of the top selling vehicles in Canada are the larger less efficient vehicles including mini vans and SUVs25. There are two main ways to reduce emissions in the passenger road transportation segment, which accounts for the largest share of Canadian’s personal CO2 emissions: change behaviour (reduce car usage), or change technology and infrastructure (make cars more fuel efficient, create a larger market for alternatively powered vehicles, improve public transportation). Convincing people to use their car 10% 22

Natural Resources Canada and Environment Canada, The One Tonne Challenge Tracking Survey – Spring 2003, pg. 5 23 Ibid. 24 Ibid. pg. 28 25 Ernst & Young Car report, 2002.

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less, as the Government of Canada has suggested, may be a difficult concept to “sell” to the public and potentially impossible to track. Furthermore, changing technology and infrastructure will be a vast and lengthy process.

Gas An Ipsos Reid opinion polling study found that 37% of 1,000 18 + years old Albertans, are willing to pay more for gasoline at the pump (Ipsos Reid 2002). However, Albertans were found to be much more willing to pay extra for ‘one-off purchases’ (i.e. installing high efficiency windows in their house) than to make lifestyle changes such as paying higher prices for energy at the pump (Ipsos Reid 2002). A national study done by Environics found a similar result of 30% WTP more for cleaner gasoline (Environics 2001). Neither of these studies gave a quantitative amount to clarify what “more” might mean in dollars and cents. Market share data could not be compared to WTP more for gasoline at the pump, as there are no widespread cleaner gasoline options. One way to accumulate market share data could be to consider the percentage of people filling up with the premium grade gasoline, often called “Gold” or “Premium” at the pumps. According to an industry expert, approximately 10% of all gasoline purchases are comprised by premium priced gas26. Since this benchmark does not correlate with an individual’s desire to pay more for a cleaner gasoline, this data is only exploratory. If a cleaner gasoline was introduced to the market, then it would be possible to ascertain the market share of that gas relative to the regular gas.

Cars Ernst & Young, Cap Gemini, and Maritz Automotive Research Group did a study on Canadians’ Attitudes Towards Purchasing Environmentally Friendly Vehicles (Maritz 2001). The purpose of this study was to test WTP for environmentally friendly vehicle solutions. This opinion poll reached over 2,000 Canadians across the country and concluded that for over 80% of Canadians environmental concerns are a factor when purchasing a new vehicle (Maritz 2001, p. 4). Half of these individuals thought that the environment was ‘extremely important’. Contrary to prevailing wisdom that younger people are more environmentally conscious, in this study, younger people were not so keen on environmental factors while deciding on what kind of vehicle to buy which could, for example, be attributed to the fact that younger people have lower disposable incomes. Provincial results 26

Personal communication. Bob Clapp. December 2003.

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indicated that Ontarians and British Colombians were found to be most concerned about the environment with regard to new vehicles. The hypothesis was that consumers would be concerned about the environment, but show little interest in paying extra for environmentally friendly vehicle solutions. The contrary was found: Canadians were also willing to pay extra for a vehicle if it addressed their top environmental concern. Nearly 40% of Canadians indicated that they would be willing to pay extra for greener vehicles. The average amount that Canadians were willing to pay extra for greener vehicles was CAD $1,820 ranging from CAD $50 to CAD $5,000 (Maritz 2001, p. 8). Fifty three percent of respondents thought that they did not know enough or did not know anything about environmental issues related to vehicles (Maritz 2001, p. 8). Top environmental concerns were vehicle exhaust emissions: smog (40%), greenhouse gases (35%). Recycled material used when making the new vehicle (14%), and the amount of material that can be recycled upon disposal of the vehicle (9%) were of less concern (Maritz 2001, p. 6 and 7). Lower income brackets were found to have a higher level of concern for the environment than wealthier Canadians when looking at vehicle purchase decisions (Maritz 2001, p. 5). This might indicate that automobile manufacturers should focus on vehicles that are preferred by less affluent Canadians - such as sub compact and compact vehicles - when considering to introduce environmentally friendly technology (Maritz 2001, p. 6). For vehicles it is difficult to have a clear understanding about the difference between those purchasing a compact vehicle, because of the environmental benefits versus how many people are buying the same compact vehicle because of its cost, resale value, and reliability record (i.e. the Honda Civic). The difference between what consumers are WTP versus what they actually pay will become more clear when the hybrid and alternative cars become widely available. Because they will be at a premium to current high sales compact vehicles it will be more conclusive to note the number of consumers that are buying a compact hybrid car because of its efficiency versus to imply that those currently buying a compact car (non-hybrid) are buying it because of its fuel efficiency attributes.

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2.5 Analysis Summary The difference between what people say they are willing to pay and what they actually purchase is significant. This means that industry must not assume that just because 90% of the population states they will pay $5 more per month for green power that they actually will. This occurs for two major reasons. 1. External or Structural Barriers. The consumer may be willing to pay for an environmentally friendly product but are unable to do so. External or structural barriers are the barriers that exist that are out of the consumers’ control. These include infrastructure, product availability and affordability issues, for example: •

The environmentally friendly product is not available to them where and when they shop.

•

There is a lack of infrastructure to support the environmentally friendly product.

•

They do not have enough money to purchase a more expensive environmentally friendly product model.

2. Internal or Motivational Barriers. Internal or motivational barriers are the barriers that exist only as a result of consumer perception, cognitive processes, beliefs and habits. Internal barriers may not be self evident to the consumer. In this reason for the difference between the willingness to pay and the actual purchases consumers make, consumers simply want to perceive themselves as “environmentally conscientious”, and for one reason or another they simply do not act in a way that is consistent with their self identification. The following characteristics augment such barriers: •

There is lack of awareness about of benefits of product

•

There is a lack of faith that their green purchase makes a difference in the grand scheme of things

•

Lack of connection between a consumer driven lifestyle to environmental degradation

•

Selfishness

•

Laziness

•

Conformity – i.e. the desire to be like everyone else and perceive that green isn’t mainstream.

•

Resistance to change (focus group)

•

Reluctance to spend more money (“ “)

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Although there are many barriers to consumers’ reduction of emissions, there are also several motivators. From the in-field survey research, four market incentive options were considered. The incentive options included: rebates, free product, preferential loan terms and extended warranties. Respondents were asked for each incentive option whether their purchase decision would be affected. Of the four incentives considered, rebates offered the broadest appeal. Most participants (71.2%) said they would be definitely (42.2%) or strongly (29.0%) influenced by them (Figure 3). Rebates were followed by free product, as the most effective means to motivate product purchase.

Figure 3 – Influence of Rebates on Buying Decisions

N/A 11%

Weak/None 18%

Definitive/Strong 71%

It was evident throughout the research that improved measurement and tracking of market share for energy efficient or green product categories are needed in Canada. It is imperative to know baseline penetration statistics so that future sales can be analyzed. For example, if there is a market incentive put into place on ENERGY STAR® qualified washers, there will be no way of knowing how successful the initiative was at increasing market share. This data is also important to manufacturers who might be looking to produce an energy efficient product. Companies need to accurately project market potential in order to build a business case. If they do not have substantial data, a business decision may be too risky to undertake, which in this particular example might lead to the lack of new energy efficient products being developed for the Canadian marketplace.

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Areas of Opportunity There seem to be particular areas of opportunity with green power as the difference between what people say they are willing to pay versus what they are buying. However, this may be in large part due to the infrastructure. Therefore, to capitalize on green power as a source of individual emission reductions, large scale market and policy initiatives need to take place paced with the production of alternative power sources. Another area of opportunity appears to be energy efficiency in the household. Although consumers do not have a clear awareness or understanding of the environmental impacts of their household energy use27, they are motivated by the cost recovery that can be achieved by energy efficiency measures28. This indicates that market based incentives for residential energy efficiency that focus on pocket book issues will capture the public’s attention. Encouraging households to upgrade their furnace from a non-condensing to a condensing furnace has taken place to-date with success. This is an area where the utilities and manufacturers have gained market share effectively by the use of financial incentives. Since the market already has this issue well covered, this is an area that the government will only see a marginal improvement should they invest additional resources to the current allotment. For all of the energy efficient products outlined in the analysis, the main objective is to increase market share. Once the market share has increased the product price should decrease as a result of economies of scale. Market share will not be increased by educating the consumer without complimentary market based initiatives.

When dealing with the public it is important to note that the opportunities for emission reductions around the home lie with homeowners versus renters. The major ways to cut emissions require investment into the home, which renters typically are not interested in. However, renters can be targeted for their transportation emissions.

27

Decima Research Inc. for the Natural Resources Canada and Environment Canada, The One Tonne Challenge Tracking Survey – Spring 2003, April 2003. pg. 5 28 Ibid.

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Section 3.0 Conclusion Climate change is the change in the “average weather” of a region, which includes temperature, wind patterns and precipitation29. Climate change has been established as a veritable threat to our environment, ecosystems and human health. Greenhouse gas emissions such as CO2, generated primarily from the burning of fossil fuels by humans, are implicated with the increasing temperature of the earth’s surface, particularly in the last two decades. Since consumers account for 25% of all greenhouse gas emissions in Canada, they need to take personal responsibility for reducing their emissions. This is a significant, challenging and potentially costly task. However, the costs to each individual consumer are unclear and may be unclear for quite sometime. In the meantime, reports such as this one are critical attempts to understand consumers’ willingness to pay (WTP) for such costs. WTP information will be relevant for industry and regulators on such strategic product decisions as pricing, manufacturing, the use of regulatory or financial mechanisms and market based incentives. Also, once cost as a potential barrier to consumer engagement on climate change is quantified and understood, it can be addressed meaningfully. The Consumers Council of Canada (CCC) completed this project on consumers’ willingness to pay for climate change as a natural progression on the work completed to-date around consumers and their role with respect to climate change. The success of Canada’s Action Plan on Climate Change depends in part on actions that consumers might be prepared to take such as retrofitting houses and changing purchasing habits. As a leading consumer advocate in Canada, it is essential that the Consumers Council of Canada understand the view of the general public around WTP. It is also critical that the Consumers Council of Canada is armed with effective options that can be suggested to government, industry and the public to encourage the mitigation of greenhouse gases by consumers. In order to effectively remove market barriers and motivate consumers to buy products that are more climate change friendly, four major conclusions have been developed. These conclusions are tools and approaches to reduce some of the barriers that prevent Canadian consumers from taking personal responsibility for their buying decisions that affect climate change. In addition these conclusions will drive the report’s final recommendations.

29

http://www.climatechange.gc.ca/english/climate_change/

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1. Consumers are primarily interested in price and are not prepared to pay for environmental benefits. In the focus group work, five out of six chose the lowest cost air conditioner when given a choice between three different units with three different EER ratings. The $25 annual operating savings was not worth the initial cost price premium of $200 for the higher rated EER model. This shows that the consumers did not see the value of buying the more energy efficient product given that the operational savings were not seen as significant relative to the price premium. The value of the higher EER rated unit (the most expensive unit) was inconsequential in their decision. Only price really mattered.

2. Consumers do not know what they are buying when they pay for climate change. Canadian consumers do not understand that there are targets of CO2 emission reductions that must be met to address climate change. If they do not understand what and why they are paying extra towards climate change they will not value any sort of price premium for the issue of climate change. The government of Canada must tell the public about the issue over and over again.

3. Increased variety and type of financial incentives and policy options should be reviewed and administered to appropriate markets to increase sales penetration of energy efficient products. Incentives are an important part of gaining penetration for energy efficient products in the market. Incentives attract attention in the market place and help address the higher initial costs of many efficient products, costs that are often high when a technology is just entering the marketplace30. a) Rebates were the most impactful market-based incentive according to our survey and focus group to encourage them to buy a particular product. In fact, three out of four (72%) of our survey respondents said they would be motivated to buy energy efficient products over less efficient and lower cost alternatives through the use of rebates. Since rebates were stated to be the most popular incentive in moving towards energy efficiency in residential homes, evidence would indicate future incentive programs should offer purchase price rebates. Whether or not these 30

American Council for an Energy-Efficient Economy. Market Transformation: Substantial Progress from a Decade of Work, April 2003, pg. 42.

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price rebates are offered at the point of purchase and therefore redeemed immediately or via mailin rebate should be decided industry by industry and product by product. As many people do not ever redeem their mail-in rebate, point of purchase redemption may be a stronger call to action and therefore a more effective utilization of rebates. b) Free Product was the second most prized market-based incentive by consumers. Two out of every three (66%) of surveyed consumers say that free product is a “prime driver” for purchasing climate change friendly products. Women were particularly motivated by free product. Therefore, Industry Canada should consider strategic free product items to increase market share of energy efficient and climate change friendly products, especially those that are targeted at women. This also may encourage alliances between various industries for common goals such as increased sales. If industry is serious about increasing the market share of the environmentally friendly products, they must be as creative in the marketing and promotion of those products, as they are with their other products.

In the report by the Consumers Council of Canada to Industry Canada entitled: Strategic Options for Building Capacity in Consumer Groups to Mobilize Consumers on Climate Change, it was recommended that a granting program be created to ensure that Consumer Groups could develop or have the means to become involved with consumer education and outreach initiatives around climate change. When incentives, promotion and policy have successfully advanced a product’s market share though voluntary initiatives to critical mass, codes and standards should be considered to bring the market laggards in line with what is happening in the general population. Moreover, codes and standards can be applied to support the changes happening in the market place. “A common market transformation strategy is to use voluntary programs to gain substantial market share for a technology or practice, and then to make it mandatory via a building code or appliance standard”. (ACEEE 2003 – Market Transformation Study) “Market transformation initiatives can advance technologies to the point where codes and standards are not controversial. By working in tandem, voluntary market transformation initiatives and mandatory codes and standards can achieve greater saving than either approach can achieve alone.” (ACEEE 2003 – Market Transformation Study)

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4. Canadian companies and citizens need to have increased access to issue and market information (eg. market share) for climate change broadly and energy efficient or environmentally friendly products specifically.

a) The end consumer needs to be aware of more climate change friendly product options and understand the benefits of buying those particular products over others. As it was proven in the in-field surveys consumers who are aware of the issue of climate change are more likely to pay premium pricing for products which they see as solutions. However, promotion (i.e. advertising, education) of energy efficient (and therefore climate change friendly) products should emphasize the full range of benefits of a product, not just energy savings in order to be successful31.

As is

outlined in a market transformation study done by the American Council for an Energy-Efficient Economy, and also discussed in the previous work on mobilizing the public around climate change done by the Consumers Council of Canada, the most successful market transformation initiatives are multi-pronged including: education, training, incentives and promotion32. It is equally important for retailers and their sales forces to be well educated in ENERGY STAR® and environmentally friendly products if they are to sell them. Industry may need to consider incentives for retailers and sales people also to ensure that they feel the personal urgency to promote more environmentally friendly products.

In the report by the Consumers Council of Canada to Industry Canada entitled: Strategic Options for Building Capacity in Consumer Groups to Mobilize Consumers on Climate Change, it was recommended that a granting program be created to ensure that Consumer Groups could develop or have the means to become involved with consumer education and outreach initiatives around climate change. b) Improved measurement and tracking of market share for energy efficient or green product categories are necessary in Canada. It is imperative to know the baseline so that successful energy efficient policies and initiatives can be measured and supported. For example, whereas data on ENERGY STAR® market penetration figures were available in the US, none were available in Canada. In Canada, only large companies have the financial resources available to collect the necessary market information. 31

American Council for an Energy-Efficient Economy. Market Transformation: Substantial Progress from a Decade of Work, April 2003, pg. iii. 32 Ibid.

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Partnerships with retailers and manufacturers could play a role in increasing the availability and decreasing the cost to the Federal government of collecting necessary market information. This should be discussed with manufacturers and retailers as one possible requirement for Federal government program participation and funding.

5.

A consumer perception exists that Industry must take a lead in proving its commitment to climate change.

In the on-line focus group it was clearly stated that consumers must perceive that industry is serious about their own commitment to climate change, and prove that commitment to consumers. For instance, consumers were concerned about paying a premium for products which were more environmentally friendly, unless they knew the premium was justified because of new technology or better materials. They did not want to perceive that they were being unfairly taken advantage of when they chose to buy climate change friendly products. Where a manufacturer’s climate change friendly product option is more expensive than their other product options, there should be every effort on the part of the manufacturer to do one of two things. The first, and more preferable option, would be to develop a well conceived market-based initiative to reduce or eliminate the premium on the more climate change friendly product. The second option, which should occur only if there is not a good solution from option one, or there is a verifiable obvious reason why the consumer should pay more, is an explanation to consumers. If the manufacturer has a reason for which the premium exists, and they will not or can not reduce the premium, that manufacturer must explain the benefits that are directly attributable to the premium. There may be an opportunity for the Consumers Council of Canada to do a follow-up research report investigating best practices in communicating product and climate change benefits to the consumer. The critical differentiator between a successful campaign with consumers reducing their GHG emissions and a non-successful campaign will be directly related to consumers’ WTP. This means not just what they would hypothetically be willing to pay, but what they will actually pay when they are standing in front of the cash register at their local retailer.

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Section 4.0 Recommendations The Consumers Council of Canada (CCC) has developed this report, with the support of Industry Canada, to prove its ongoing commitment to acting as a willing partner and advisor on important national issues (such as climate change) and their impact on Canadian consumers. The CCC is willing to increase its level of activity, and encourages government to view the CCC as a credible and important voice when developing policies that effect consumers. The following recommendations have been developed as the action-oriented implications of the conclusions listed in Section 3.0. They outline three steps that need to take place in 2004 to immediately address products that provide Canadians a way to reduce their CO2 emissions. 1. Industry Canada should work with other federal departments such as Environment Canada and Natural Resources Canada to develop an education campaign about the One-Tonne Challenge. 2. Commission a report as soon as possible that will establish baseline data in Canada on energy efficient product’s market share. 3. Industry Canada should work with other federal departments such as Environment Canada and Natural Resources Canada to identify products that offer the largest emission reduction potential aided by the energy efficient product market share data. 4. Industry Canada in conjunction with Environment Canada and Natural Resources Canada, should commission a forum in 2004 that would bring together consumer groups, leading program implementers, industry players and key government decision makers to develop integrated market, policy and financial strategies for the products that have been identified with the largest emission reduction potential. •

These strategies should be specific, measurable and action-oriented.

•

They should involve an appropriate mix of public education and outreach, policy instruments and market incentives.

•

Industry Canada should not shy away from financial mechanisms and other supportive policy for products that are best in class in terms of energy efficiency.

There needs to be the establishment of a group, by government, to be accountable for the completion of the recommendations. The group could consist of Environment Canada, or Natural Resources Canada delegates who would put these initiatives into place.

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Section 5.0 References American Council for an Energy-Efficient Economy, Market Transformation Programs: Past Results and New Initiatives, by Steven Nadel and Howard Geller, January 1996. American Council for an Energy-Efficient Economy, Market Transformation: Substantial Progress from a Decade of Work, by Steven Nadel, Jennifer Thorne, Harvey Sachs, Bill Prindle, and R. Neal Elliot, April 2003. Arthur D. Little, EIA Technology Forecast Updates, Reference Number 8675309, October 2001 (http://www.eia.doe.gov/oiaf/aeo/overview/equip_tbl.html). Berrens R., Bohara A., Jenkins H., Silva C, Weimer D., Information and effort in contingent valuation surveys: application to Global Climate Change using national USA internet samples, September 2003. Corrected Proof is in Press for the journal ‘Environmental Economics and Management’. Carr L., Mendelsohn R, Valuing Coral Reefs: A Travel Cost Analysis of the Great Barrier Reef, Yale University, School of Forestry and environmental Studies, New Haven CT, USA, November 2002. CREEDAC, Econometric Models for Major Residential Energy End-uses, by Alan S. Fung, Merih Aydinalp, V. Ismet Ugursal, April 1999, http://www.dal.ca.daltech.creedac – click on reports. CREEDAC, EnerGuide for Houses Database Analysis, April 2001, http://www.dal.ca.daltech.creedac – click on reports. Comeau J., Chapman D., Letter to the Editor, Ecological Economics 40 (2002), p. 317-320. Compas Inc. Ottawa/Toronto, The One Tonne Challenge Study, A Report to Environment Canada and Natural Resources Canada, March 2003. Environics International, Environmental Monitor 1998-2001, Willingness to Pay 10% More for Environmental Reasons. Decima Research Inc, Montreal/Ottawa/Toronto, The One Tonne Challenge Tracking Survey – Spring 2003, A Report to Environment Canada and Natural Resources Canada, April 2003.

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Greene D., Chin S., Alternative Fuels and Vehicles (AFV) Model Changes, Oak Ridge National Laboratory, Oak Ridge, Tennessee, prepared for the Department of Energy, November 14, 2000. Heating and Refrigeration Association Institute in Canada (HRAI), Market Share Data, November 2003. Hagler Bailly Canada, Transportation Table Report, Potential for Fuel Taxes to Reduce Greenhouse Gas Emissions in Transportation, Fuel Tax Policies Report, Prepared for: Federal Government Department of Public Works and Government Services, 1999. IISD, Determining Demand for Energy Services: Investigation Income-driven Behaviours, by Guertin C., Kumbhakar S., Duraiappah A., International Institute for Sustainable Development Winnipeg Canada, not yet published (Copyright IISD 2003). Ipsos Reid, Albertans and the Kyoto Protocol: A quantitative Survey, Preliminary Key Findings, May 2002 (http://www3.gov.ab.ca/env/climate/actionplan/resources.html). Krupnick A., Alberini A.,Cropper M., Simon N., O’Brien B., Goeree R., Heintzelman M., Age, Health, and the Willingness to Pay for Mortality Risk Reductions: A Contingent Valuation Survey of Ontario Residents, September 2000. Leger Marketing/ Canadian Press, How Canadians Feel About Air Pollution, Montreal Quebec, 2002. Li H., Berrens R., Bohara A., Jenkins H., Silva C., Weimer D., Would Developing Country Commitments Affect US Housefolds’ Support for a Modified Kyoto Protocol?, Department of Economics at the University of New Mexico, Texas A&M University, University of Wisconsin 2002. Maritz Automotive Research Group, Cap Gemini, Ernst & Young, Green at what cost? Canadians’ Attitudes Towards Purchasing Environmentally Friendly Vehicles, 2001. Nordhaus W., Boyer J., Warming the World, Economic Models of Global Warming, The MIT Press, Cambridge Massachusetts, London, England, 2000. NREL, Utility Green Pricing Programs: What Defines Success?, by Swezey B., Bird L., September 2001 (National Renewable Energy Laboratory, US Department of Energy/TP.620.29831).

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NREL, Willingness to Pay for Electricity from Renewable Resources: A Review of Utility Market Research, by Farhar B., July 1999 (National Renewable Energy Laboratory US Department of Energy/TP.550.26148). Oakridge National Laboratory Tennesee, Alternative Fuels and Vehicles (AFV) Model Changes, Greene D., Chin S., Center for Transportation Analysis, November 2000. OECD, Working Papers, Behavioural Responses to Environmentally-Related Taxes, Vol. VIII, No. 12, p. 1-21 (2000). Oladosu G., An Almost Ideal Demand System Model of Household Vehicle Fuel Expenditure Allocation in the United States, The Energy Journal, Vol. 24, No.1 (2003), p. 1-21. Pearce D., Turner K., Economics of Natural Resources and the Environment, Johns Hopkins University Press, Baltimore, Maryland 1990, p. 141-158. Roe B., Teisl M., Levy A., Russell M., US Consumers’ Willingenss to Pay for Green Electricity, Energy Policy 29 (2001), p. 917-925. Rowlands I., Scott D., Parker P., Ready to go green? The Prospects for Premium-Priced Green Electricity in Waterloo Region, Ontario, Environments Vol. 28, No.3 (2000). Rowlands I., Scott D., Parker P., Consumers and Green Electricity: Profiling Potential Purchasers, Business Strategy and the Environment 12, p. 36-48 (2003). Sipes K., Mendelsohn R., The Effectiveness of Gasoline Taxation to Manage Air Pollution, Ecological Economics 36 (2001) p. 299-309. Sipes K., Reply to Letter to the Editor, Ecological Economics 40 (2002), p. 321-322. The Globe and Mail, Ottawa doling out $1 Billion to address Kyoto treaty, August 12, 2003, p. A4.

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Tinggaard Svendsen G., Daugbjerg C., Hjollund L., Branth Pedersen A., Consumers, Industrialists and the Political Economy of Green Taxation: CO2 Taxation in OECD, Energy Policy 29 (2001) p. 489-497. Transport Canada, Policy and co-ordination Branch, Economic Analysis Division, An Interpretative Survey of Gasoline Consumption Demand by Passenger Automobiles: Focus on Short and Long Run Price elasticities, by. Oum T., Basso L., Yu C., Three Stars Research Corp., Vancouver, Canada, May 2003. EIO, Price Responsiveness in the NEMS Building Sector Models, Energy Information Office (EIO), US Department of Energy, by Wade S., 2003.

Section 6.0 Personal Communication Rowlands, Ian. University of Guelph. October, 2003. Bob Clapp. Former President of CPII. January, 2004. John Taylor. Consortium for Energy Efficiency. January 2004.

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Appendix One - Research Phase I Literature Review of WTP Options and Elasticity of Demand and Hurdle Rate studies

A1.0 Background Phase I Research Objective Literature Review of WTP Options and Elasticity of Demand and Hurdle Rate studies

Phase I Research Methodology To set a benchmark for reference purposes regarding future in field practical testing on willingness to pay for climate change issues in Canada, this study intends to explore the topic mentioned under point 1 in paragraph 1.3.: How much are consumers willing to pay extra for more environmentally friendly goods and services in order to reduce CO2 emissions? This research phase will examine existing studies and literature on willingness to pay for Climate Change. This study will focus on Canada, but will also include information from the USA and Western Europe. Because information on Willingness to Pay for climate change issues is not available on a very large scale yet, this study also looks into price elasticities of demand that can help predict demand reductions in response to an increase in price (i.e. an environmentally related tax). Chapter two gives a literature overview of Willingness to Pay for Climate Change Issues in General and subsequently describes Willingness to Pay extra for green electricity, cleaner gasoline, more energy efficient cars, energy efficiency improvements in our homes, and willingness to pay for mortality risk reductions. Chapter 3 elaborates on price elasticity of demand for energy use in general, and for the major sources of individual Canadian Greenhouse Gas emissions: energy use for space heating, water heating, appliances, lighting, space cooling and transportation (i.e. electricity, natural gas and gasoline use).

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A2. Willingness to pay for Climate Change Issues

A2.1. Methods for calculating Willingness To Pay for environmental issues. How can environmental damage be quantified? Or how can we measure environmental benefits? Finding the Willingness To Pay for environmental benefits, or the Willingness to Accept Environmental damage suffered can give insight into how much the environment is worth to people. In this paragraph three direct methods for measuring Willingness To Pay for environmental benefits will be discussed: •

Contingent Valuation Method

•

Hedonic Pricing Method

•

Transportation Method

Contingent Valuation Method The Contingent Valuation Method (CVM) asks people directly what they are willing to pay for an environmental benefit, or what they are willing to receive by way of compensation to accept environmental damage (Pearce 1990). The questions can, for example, be asked through a questionnaire/survey by phone, computer or on the street. The questions that are asked are aimed at getting an idea for willingness to pay contingent upon a hypothetical situation. The participants must be familiar with the issue in question and must understand what the hypothetical means of payment entail (i.e. an environmental tax of 10%). A major advantage of the CVM method is that it should, technically, be applicable to all circumstances and this method will frequently be the only technique to estimate willingness to pay for environmental issues (Pearce 1990). A drawback of the method is that willingness to pay expressed in a hypothetical market might vary from willingness to pay in an actual market. Hedonic Pricing Method A hedonic pricing approach uses the variation of property values to estimate the value of local environmental benefits (i.e. the value of a local lake). If higher property values exist due to a local environmental advantage, this information could be used to reflect what people are willing to pay for that environmental benefit (Pearce 1990).

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Travel Cost Method Willingness to pay for travel to an environmental site can be used to attach an economic value to this environmental site. Carr and Mendelsohn, for example, estimate that annual recreational benefits of the Great Barrier Reef in Australia are between USD 700 million to USD 1.6 Billion depending on the definition of travel cost (i.e. actual cost versus travel agent cost) and the functional form used in the model (Carr 2002).

A2.2

Willingness to Pay to prevent Climate Change in terms of GDP.

When people around the world were presented with the probability of a 2.5 degree C warming of the Earth due to Climate Change, a MIT publication from the year 2000 shows a willingness to pay between 0.45 and 1.9 percent of GDP to prevent the warming from happening. For this study it was assumed that people are risk averse. If a warming of 6 degrees C was insinuated, willingness to pay to prevent the warming increased and was between 2.5 and 10.8 percent of GDP (Nordhaus 2000, p. 89). See the table 1 below for a selection of results from this MIT publication. Table 1. Willingness to Pay to avoid Global Warming. Country

Willingness to pay to avoid Global Warming (% of GDP*) 2.5 degrees C

USA OECD Europe Other high income countries

0.45 1.90 0.94

6 degrees C 2.53 10.79 5.33

* GDP values were based on the year 1995. Source: Nordhaus 2000, Table 4.9., p. 90. A2.3

Willingness to Pay to support the Kyoto protocol in the USA

A conservative estimate for household willingness to pay to support the Kyoto protocol in the USA has a mean of US $191.70 per year (Berrens et al., 2003). Data for this study were collected during the years 1999 and 2000 through various sources: a telephone survey of 1,900 observations; two interactive internet samples that each resulted in well over 10,000 completed surveys; and a knowledge network internet sample (probability based) of 2,162 completed surveys (Berrens et al., 2003).

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The willingness to pay in the study mentioned above was considerably higher, US $816 per year, conditional on respondents having a positive value for the change, and as respondents put in extra effort to learn about global climate change and the Kyoto Protocol (Berrens et al., 2003). This implies that, if respondents were more educated on climate change issues and the Kyoto Protocol, they were more willing to pay to support the Kyoto Protocol. If a limit on future greenhouse gas production for major developing countries was included in the model of the study mentioned in paragraph 1 above, estimated median willingness to pay was 20 to 47 % higher than the base case of US $191.70 per year (Li, Berrens et al., 2002).

A2.4

Willingness to pay for implementing the Kyoto Protocol in Alberta

An Ipsos Reid opinion polling study done in 2002 with a sample of 1,000 Albertans of 18+ years old concluded that most Albertans are willing to pay CAD $500 or more each year to help implement the Kyoto Protocol. Only 5% of Albertans said they are not willing to pay anything, and 19% said they are willing to pay more than $2,500 each year to implement the Kyoto Protocol (Ipsos Reid 2002). See the table 2 on the next page for the complete results. Table 2. Willingness to Pay for Kyoto Protocol implementation in Alberta. Question: “Would you be willing to pay………….to implement the Kyoto Protocol?” Percentage of sample (1,000 Albertans with a response rate of 19 out of 20 people) 19% 27% 25% 15% 5% 3% 5%

Willingness to Pay to implement the Kyoto Protocol in CAD $ per year

More than $2,500 Between $1,000 and $2,500 Between $500-$1,000 Between $100-$500 Between $50-$100 $50 or less Nothing

Source: Ipsos Reid 2002.

A2.5 Willingness to pay for Mortality Risk Reduction: A Contingent Valuation

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Survey of Ontario Residents. Krupnick et all state that much of the justification for environmental policy making is based on estimates of the benefits to society of reduced mortality rates (Krupnick 2000). A survey was self-administered by computer to 930 persons in Hamilton, Ontario in 1999 to investigate how much people are willing to pay to reduce current and future risk of death. The age range of the people interviewed was 40-75 years old, and at least one third of the respondents was over age 60. Thompson-Lightstone, a survey research firm in Toronto, administered the survey over a five-month period. The mean willingness to pay for a 5 in 1,000 mortality risk reduction taking place over the next 10 years was found to be CAD $601 per year in 1999 Canadian Dollars. For a 1 in 1,000 mortality risk reduction taking place over the next 10 years, the mean willingness to pay was found to be CAD $368 per year in 1999 Canadian Dollars (Krupnick 2000). This study also concluded that willingness to pay for reduced mortality risk did not vary much by age. Persons 40 – 49 years old were found to have a slightly lower WTP than persons 50 years and older. However, the mean WTP for the 5 in 1,000 risk change remained approximately the same until about age 70, decreasing by approximately one third thereafter to CAD $417 per year. The study claims that this latter estimate is probably the most relevant one for use in valuing most of the lives “saved” from air pollution reductions (Krupnick 2000).

A2.6

Canadian willingness to pay for green electricity.

A national study done by Environics in 2001 states that 37% of the 1,500 Canadians interviewed (18 years and older) is willing to pay 10% more for green electricity (i.e. electricity produced by wind energy or solar energy).

A2.7

Willingness to pay for green electricity in Waterloo, Ontario, Canada.

A Canadian study analysed the willingness to pay extra for green electricity in the Waterloo, Ontario region (Rowlands 2003, p. 37). The Waterloo Region is a community of approximately 450,000 people in South-western Ontario, Canada. Of all surveys distributed (1,390), 34% was used for this investigation adding up to 466 surveys in total (Rowlands 2003, p. 38). The results (see table 3) of this study are not necessarily representative for other regions, or even the one in which the survey was conducted. Respondents (average age of 50 years) were older than on average in the Waterloo region (34 years); respondents were better educated than the average in the Waterloo region

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(in 54% of the respondents’ households, someone had completed university while only 17% of all adults in Waterloo have completed university); respondents were wealthier (median household income of approximately CAD$70,000 versus CAD$60,000) and had a relatively higher share of male participants (61% versus 49%). Moreover, participants were selected based upon an earlier request to indicate their willingness to pay at least CAD $25 for a home energy evaluation, which suggests a special interest in energy issues. A last limitation is that this study investigates ‘intentions’ rather than ‘actions’ that could be vastly different in reality (Rowlands 2003, p. 38). In fact, earlier work on green electricity concluded that ‘only a small share of those who say they will pay more actually do so when given the opportunity’ (Rowlands et al., 2000, p. 108). Since there are many limitations and this study is only exploratory, conclusions should be seen as preliminary (Rowlands 2003, p. 45). The survey question was: ‘How much extra would you be willing to pay on your electricity bill each month to ensure that all of the electricity you use comes from ‘green’ sources?’ (check only one). Table 3. Willingness to pay extra for green electricity in the Waterloo region. Options for willingness to pay extra

Results (percentage of the 466 respondents)

$0 – don’t want green

6%

$5/month

21%

$10/month

45%

$25/month

24%

$50/month

5%

Source: Rowlands 2003, p. 42.

A2.8

Willingness to pay for green electricity in the USA.

A study done in 1999 by the National Renewable Energy Laboratory of the Department of Energy of the US Government compiled a selection of recent market research studies on consumers’ willingness to pay for green electricity and drew the following conclusions (NREL 1999, p. V): •

Customers favour renewable electricity sources, but may know little about them. When more educated about options, customers would be more inclined to be more favourable. The most preferred renewable electricity sources are wind and solar electricity generation.

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•

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The majority (52% to 95%) of residential customers is willing to pay a modest amount extra per month for renewable electricity. Willingness to pay increases when customers are more educated about renewable energy options. •

Willingness to pay extra for green electricity in all studies reviewed followed a predictable pattern (see table 4). It is likely that any new utility market survey asking residential customers about willingness to pay extra for green electricity will show a similar pattern of results as found in table 4 (NREL 1999, p. V.). Table 4. Willingness to pay extra for green electricity in the USA. Options for Willingness to pay extra

Results (percentage of people

for green electricity per month

interviewed)

At least US $5 or more

70%

At least US $10 or more

38%

At least US $15 or more

21%

Source: NREL 1999, p. V.

A2.9

Actual participation in green energy programs in the US

In the USA, electric utilities in 29 States are currently implementing green pricing programs (NREL 2001, p. V). Customer participation rates for green power programs with green pricing have been found to be less than 1% for more than 50% of the utility programs. Some of the more successful33 programs have managed to garner customer participation rates between 3% and 4%. Only one program reached a customer participation rate of 7.4% (Moorhead Public Service). Los Angeles Department of Water and Power (LADWP) is the leader in actual customer participation in its green power program, but half of its customers are not paying a higher price for the green power (NREL 2001, p. 14). The higher participation rates for the more successful power programs with green pricing indicate that customers will respond favourably when green pricing programs are well designed and marketed (NREL 2001, p. V.). Only about 12 utilities have been able to develop much more than 2 MW of new capacity as a result of their green pricing program (NREL 2001, p. V). There is no definite link between the amount of the green 33

The success of a green pricing program is measured according to the following: 1) the amount of new renewables development fostered by the program, 2) the total number of customer participants, 3) the customer participation rate, and 4) the premium charged to support new renewables development (NREL 2001, p. 13).

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pricing premium and the participation rate (NREL 2001, p. 10). Green pricing premiums of the top 10 (lowest premium) utilities lie in the range of: 1.0 cent/kWh to 1.92 cents/kWh (NREL 2001, p. 15). The selection of green energy comes from wind, landfill methane, solar, geothermal and PV (NREL 2001, p. 16). An exception to these results is Austin Energy which supplies renewable energy to its customers (100% of energy use if preferred) for just 0.17 cents/kWh more than for the standard utility service (NREL 2001, p. 15).

A2.10 Willingness to pay for cleaner gasoline An Ipsos Reid opinion polling study found that 37% of 1,000 Albertans of 18+ years old are willing to pay more for gasoline at the pump (Ipsos Reid 2002). However, Albertans were found to be much more willing to pay extra for ‘one-off purchases’ (i.e. installing high efficiency windows in their house) than to make lifestyle changes such as paying higher prices for energy at the pump (Ipsos Reid 2002). A national study done by Environics found a similar result of 30% willingenss to pay more for cleaner gasoline (Environics 2001).

A2.11 Willingness to pay for more energy efficient and alternative cars. Ernst & Young, Cap Gemini, and Maritz Automotive Research Group did a study on Canadians’ Attitudes Towards Purchasing Environmentally Friendly Vehicles (Maritz 2001). The purpose of this study was to test Willingness to Pay for environmentally friendly vehicle solutions. This opinion poll reached over 2,000 Canadian across the country and concluded that for over 80% of Canadians environmental concerns are a factor when purchasing a new vehicle (Maritz 2001, p. 4). Half of these individuals thought that the environment was ‘extremely important’. Contrary to prevailing wisdom that younger people are more environmentally conscious, in this study, younger people were not so keen on environmental factors while deciding on what kind of vehicle to buy which could, for example, be attributed to the fact that younger people have lower disposable incomes. Provincial results indicated that Ontarians and British Colombians were found to be most concerned about the environment with regard to new vehicles. The hypothesis was that consumers would be concerned about the environment, but show little interest in paying extra for environmentally friendly vehicle solutions. The contrary was found: Canadians were also

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willing to pay extra for a vehicle if it addressed their top environmental concern. Nearly 40% of Canadians indicated that they would be Willing to Pay extra for greener vehicles. The average amount that Canadians were willing to pay extra for greener vehicles was CAD $1,820 ranging from CAD $50 to CAD $5,000 (Maritz 2001, p. 8). Fifty three percent of respondents thought that they did not know enough or did not know anything about environmental issues related to vehicles (Maritz 2001, p. 8). Top environmental concerns were vehicle exhaust emissions: smog (40%), greenhouse gases (35%). Recycled material used when making the new vehicle (14%), and the amount of material that can be recycled upon disposal of the vehicle (9%) were of less concern (Maritz 2001, p. 6 and 7). Lower income brackets were found to have a higher level of concern for the environment than wealthier Canadians when looking at vehicle purchase decisions (Maritz 2001, p. 5). This might indicate that automobile manufacturers should focus on vehicles that are preferred by less affluent Canadians - such as sub compact and compact vehicles - when considering to introduce environmentally friendly technology (Maritz 2001, p. 6).

A2.12 Willingness to pay for energy efficiency improvements in Canadian homes. The Federal Government recommends people to have an “EnergyGuide34 for Houses” evaluation done to find out where they can improve upon energy efficiency in order to reduce Greenhouse Gas emissions. This can save up to 3 tonnes of CO2 emissions per household per year35. Some other recommendations to improve home energy efficiency are36: •

Install a programmable thermostat to automatically change the temperature of your house at night and when no one is at home which can save 0.5 tonnes of CO2

34

•

Draft-proofing which can save almost 1 tonne of CO2

•

Add insulation to the attic which could save at least one tonne of CO2

•

Install high efficiency windows

•

Reduce the temperature in your hot water tank

•

Improve the insulation in your house

•

Seal and insulate forced air system ducts

http://oee.nrcan.gc.ca/houses-maisons/ http://www.climatechange.gc.ca/plan_for_canada/challenge/index.html 36 Ibid. 35

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•

Lower the thermostat by 2 degrees C.

•

Install a low flow showerhead

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Homeowners can save an average of 25 percent per year on their energy bills by implementing the recommendations of the “EnerGuide for Houses Evaluation” and can reduce household emissions by more than 2 tonnes per year, depending on the type of home37. The greatest potential for energy savings is in older houses. A CREEDAC study that analysed 20,000 homes with regard to EnergyGuide recommendations found out that, even though initial investments are higher in older houses, payback periods are shorter than in newer houses. However, this CREEDAC study also concluded that most of the people don’t implement the suggested EnerGuide upgrades with the a high impact on energy savings. Actual energy efficiency improvement decisions were found to be more based on lower capital investments (with longer payback periods in this case) and on lifestyle choices such as aesthetics (CREEDAC 2001, p. 58-59). In other words, people preferred to undertake energy efficiency improvements that were less economically attractive (longer payback time) than the ones recommended by EnerGuide. Willingness to pay for energy efficiency improvements in Alberta homes. An Ipsos Reid opinion polling study done in 2002 with a sample of 1,000 Albertans of 18+ years old concluded that Albertans are quite willing to make energy efficiency improvements in their homes (Ipsos Reid 2002). However, there were no costs attached to the questions. This Ipsos Reid study also found that Albertans are willing to make ‘one-off changes’, but are less willing to make lifestyle changes. Albertans prefer to make one-time purchases that increase energy efficiency over paying higher prices for energy (Ipsos Reid 2002). See table 5 for more details.

37

http://www.climatechange.gc.ca/plan_for_canada/tips/index.html

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Table 5. Willingness to implement actions to deal with Climate Change in Alberta. Action

Percentage of 1,000 Albertans that are willing to implement the action to deal with Climate Change

Buy a programmable thermostat

91%

Install high efficiency windows in your house

89%

Replace your old furnace with a high efficiency furnace

88%

Reduce the temperature in your hot water tank

87%

Improve the insulation in your house

87%

Buy a smaller or more fuel efficient vehicle

85%

Take public transit to work rather than driving

64%

Pay more for household energy cost

(a national study done by Leger Marketing in the year 2002 found a result of only 20%) 44%

Pay more for gasoline at the pump

37% (a national study done by Environics in 2001 found a similar result of 30%)

Source: Ipsos Reid 2002.

A2.13 Hurdle rates for energy efficient appliance investments. Direct information on willingness to pay for more efficient appliances (other than table 5 provided in paragraph 2.9) is hard to find. A different way to address willingness to pay for energy efficiency choices is looking at ‘hurdle rates’, also referred to as ‘implicit discount rates’.

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A hurdle rate38 can be estimated as the ratio of the weight of ‘installed cost’ to that of ‘operating cost’. Installed cost represents the capital cost of the equipment plus the cost to install it, excluding any finance costs (Arthur D. Little, 2001). The higher the hurdle rate, the less likely consumers are inclined to invest in energy efficiency since operating cost are less important, whereas installed cost are more important (Arthur D. Little, 2001). The Energy Information Administration (EIA)39 at the Department of Energy of the US Government has provided the following ‘hurdle rates’ for appliances: Furnaces:

15%

Fridge:

19%

Central AC:

25%

Freezers:

37%

Gas stove:

42%

Gas dryer:

47%

Gas water heaters:

47%

Electric stove:

83%

Electric water heaters: 83% Electric Dryer:

90%

Dishwasher:

111%

Room AC:

142%

Willingness to Pay for energy efficiency is higher when hurdle rates are lower. The hurdle rates above reflect observed purchase behaviour of residential consumers. These hurdle rates are often much higher than would be expected if financial considerations alone were their source. Uncertainty about future energy prices and lack of information about energy savings, short tenure of residential home ownership could all be reasons for relatively high hurdle rates. The large range of hurdle rates reflects differences in the way consumers purchase the various technologies. Purchases for water heaters, for example, often occur at the time of equipment failure, which restricts the choice to equipment readily available from the plumber40. Space conditioning equipment is not as critical as water heating 38

Email explanation by John Cymbalsky from the EIA, DOE, US Government (Email: [email protected]). 39 Ibid. 40 Ibid.

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during certain parts of the year, which, in theory, might leave the customer more flexibility regarding timing when choosing to purchase a new technology41. Therefore, space conditioning equipment can have a lower hurdle rate, reflecting, for example, that consumers have time to compare different technologies and give more weight to operating cost and energy efficiency performance when buying a new model (i.e. furnace). In practice, however, most space conditioning equipment is also replaced when it fails42. All natural gas based appliances have lower hurdle rates than the equivalent electricity based appliances (i.e. natural gas dryer versus electric dryer). This could mean that, in their purchase decision of a natural gas based appliance, consumers attach more weight to the energy savings that can be made when using a natural gas based appliance in the long run than to the initial capital cost of buying the natural gas based appliance. Natural gas based appliances usually cost more to purchase but use less energy to operate than electricity based appliances.

A3. Price elasticity of demand A3.1. Predicting behavioral response to an environmental tax. Because actual willingness to pay studies for climate change issues are limited, other ways of predicting the behavioral response to climate change policy are important to review as well. Price elasticities of demand may help predict the behavioral response to an environmentally related tax and are therefore very useful for predicting the effectiveness of an environmental tax. The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in price, and is defined as the percentage change in demand that occurs in response to a percentage change in price. The price elasticity of demand is closely related to current preferences, technology development and the availability of substitute goods. These factors can change significantly over time, and demand for a good is usually more elastic in the long run when people have more options available for substitute goods for example (OECD 2000, p. 6). Some examples of price elasticity of demand values are: e0

Giffen Goods: if the price of a good increases, demand increases.

-1 < e < 0

Price inelastic goods: if the price of a good increases with 1%, demand will decrease with less than 1%.

e < -1

Price elastic goods: if the price of a good increases with 1%, demand will decrease with more than 1%.

If the price elasticity of demand for a good equals -0.2, this good is inelastic. If the price of this good would increase with 10%, demand would decrease with 2%. There are limitations to the use of price elasticities of demand to predict exact consumer behavior changes. A Climate Change tax, for example, could generate a different behavioral response than a general energy tax if consumers saw the public good element in the former but not the latter. Moreover, energy consumption patterns of end consumers are a result of many complex and interrelated socioeconomic and technical factors as well as consumers’ energy conservation consciousness (CREEDAC April 1999, p. 9). Other limitations to the use of price elasticities of demand to predict exact consumer behavior include (OECD 2000, p. 6): •

The magnitude of the price change can have an effect on the consumer response. At a low price level, the effect of a percentage price increase could be relatively smaller than at a higher price level for example.

•

The effect of a price increase on consumer demand can be different when it is perceived as permanent compared to temporary. Consumers could view an increase of prices via taxes as more permanent than via market (demand-supply) forces.

•

The effect of a price increase can have a larger indirect effect if other factors change at the same time (i.e. income reduction).

A3.2

Price elasticity of demand for energy use.

Price elasticity estimates for energy use show that short run demand for energy is rather inelastic: -1 < e < 0 (OECD 2000, p. 12). Nevertheless, if the price elasticity of demand is closer to –1, a demand change as a result of a price increase could be substantial hence environmental taxes can have a significant impact on reducing energy demand (OECD 2000, p.12). Even if the price elasticity is closer to 0, it might be

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useful to introduce an environmental energy tax for the simple reason of collecting government revenue that can be invested in environmentally friendly technology development for example.

A3.3

Price elasticity of demand for electricity and natural gas in Canada.

A CREEDAC43 study analyzed price elasticities of energy demand for electricity and natural gas use in Canada based on 1993 data specified by three types of residential energy end-use: 1) appliances, 2) space heating, and 3) domestic hot water heating (CREEDAC 1999). CREEDAC used demographic data (i.e. house characteristics, weather and appliance stock and usage), and energy use/billing data from a Survey of Household Energy Use (SHEU) from Statistics Canada dated February 1993. All households in this CREEDAC study were single family dwellings and included 569 Canadian44 households: 320 electric heated households and 249 natural gas heated households (CREEDAC 1999, p. 21). Short-term price elasticities were negative and close to zero, indicating that the impact of a price increase on energy demand is rather inelastic (CREEDAC 1999 p. 7). Long run price elasticities were found to be negative and larger than unity, indicating that in the long term end use energy consumers will reduce energy demand with more than one percent in response to a one percent energy price increase. Hence consumers were more price elastic in the long term (CREEDAC 1999, p. 7). These results are not surprising because residential energy consumption is a normal service and a necessity. Moreover, residential energy consumption is influenced by existing household characteristics, and by appliance equipment stock. There are few easy opportunities for consumers to reduce their energy consumption instantaneously through changing variables such as insulation levels or furnace/boiler technology without major capital investment (CREEDAC 1999, p. 65). Table 4 shows which price elasticity figures were identified by CREEDAC. The electric heated households in table 4 have no substitute45 for energy use other than fuel oil, whereas the natural gas heated households have an option to substitute for electricity at a much higher price though than natural gas which makes electricity unfavorable for the natural gas heated households46. Most of the natural gas heated households are located in regions where oil is not a major player in residential home heating 43

Canadian Residential Energy End-use Data and Analysis Centre The following provinces are represented: Newfoundland, New Brunswick, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia. 45 Only 31 households of a total of 320 electric heated households that were included in this study have natural gas available in their areas (CREEDAC 1999, p. 17). 46 Alan Fung from CREEDAC: [email protected] 44

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market due to significantly lower prices of natural gas compared to oil (CREEDAC 1999 p. 17). Natural gas heated households consume more energy for all end-uses. This could be due to the fact that 1) electric appliances are more efficient47, and 2) natural gas heated households experience colder climate (higher heating degree days) in winter time and a warmer climate (higher cooling degree days) in summer time (CREEDAC 1999, p. 29). Appliance energy use: The short run price elasticity of energy demand for natural gas heated households is much lower than for electric heated households (see table 6). This trend is reversed for the long term price responses. The difference in short-run price elasticities of demand can be explained by the fact that electric heated households face higher fuel prices and have higher household energy expenditures. Therefore electric heated households are expected to respond with higher demand reductions due to a price increase in the short term than natural gas heated households (CREEDAC 1999, p.30). The fact that for a lower price level, the impact of a percentage price increase will be relatively smaller than at a higher price level is confirmed by an OECD study on price elasticities of energy demand (OECD 2000, p. 6). The elastic nature of the long-term price elasticities indicates that consumers tend to become more energy conscious if they are faced with long term price increases. The long term price elasticity for the natural gas heated households (-1.746) is higher than for the electric heated households (-1.208). This indicates that the natural gas heated households would further reduce their electricity consumption by appliances than electric heated households if they would face long term electricity price increases (CREEDAC 1999, p. 30). In other words, if natural gas heated households would face long-term price increases in electricity, they might likely switch some of their electricity consuming appliances to natural gas ones48. Electric heated households don’t have the option to switch to natural gas as an energy source because natural gas is simply not available in their area. Space heating energy use: Natural gas heated households respond with lower demand reductions due to a fuel price change than electric heated households in both the short and the long term. The short term effect was expected since electric heated households face higher fuel prices and have higher household energy expenditure. The very elastic nature of the long-term price elasticities in electric heated households indicates that

47

Average efficiency of natural gas heated domestic hot water heaters is 55% and that of electrically heated domestic hot water heaters is 83% for example (CREEDAC 1999, p. 24 and 25). 48 Alan Fung from CREEDAC: [email protected]

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consumers will tend to seriously cut down on energy use if they are faced with long-term electricity price increases. Or they may supplement their space heating energy requirements in the long term with a less expensive fuel such as wood since natural gas is not available for these electric heated households (CREEDAC 1999, p. 32). Domestic Hot Water Heating energy use: Short term price elasticities for energy demand at natural gas – and electric heated households are relatively the same. However, the long term price elasticity of energy demand for natural gas heated households is much higher than for electric heated households. The very large magnitude of long term price elasticity of energy demand for natural gas heated households may indicate that consumers are very sensitive of fuel price increases for domestic hot water heating energy consumption (CREEDAC 1999, p. 37). Table 6. Household End-use Energy Consumption Elasticities.

End-use Energy Consumption

All natural gas heated* household Price Elasticity of Demand

All electric** heated households Price Elasticity of Demand

Long run

-0.341 -1.746

-0.594 -1.208

Space Heating Energy Use Short run Long run

-0.246 -0.904

-0.467 -2.804

DHW Heating Energy Use Short run Long run

-0.534 -2.510

-0.548 -1.213

Appliance Energy Use Short run

Source: CREEDAC 1999. *Natural gas heated households have a substitution choice for electricity, however, electricity is much higher priced than natural gas49). **Electricity is widely used in areas where cheap electricity is available. Natural gas is rarely available in these areas50.

49 50

Alan Fung from CREEDAC: [email protected] Ibid.

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A3.4

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Price elasticity for energy demand and income-driven behavior.

Lower-income Canadian households spend a larger share (8%) of their budget on energy use than those with higher incomes (2%). Lower-income households will therefore be hit disproportionately harder by an energy price increase than higher-income households (IISD 2003, p. 2 and 30). This makes it extra important to analyze potential impacts on lower-income households when an increase in energy prices is considered for climate change purposes. A 2003 IISD study found that low-income households are more responsive to price and income changes than higher income households (IISD 2003, p. 1). For results of this study see table 7. Space heating showed the strongest variation between low and high-income group energy price elasticities with a factor of almost 2 (IISD 2003, p. 30). This high variation for space heating elasticities can partly be explained by the fact that the low-income group has the greatest share of space heating needs at 62% of its total energy needs. Whereas the high-income group has a 58% share of space heating in its total energy needs (IISD 2003, p. 25). Moreover, price elasticities will be higher if energy prices are higher. Lower income households face higher output energy prices than those with higher incomes, except regarding hot water for which there is almost no variation in prices for different income levels (IISD 2003, p. 31). Lower income households can therefore be expected to have higher price elasticities than higher incomes in general. The energy price difference by income levels is greatest for space heating which explains the large variation of price elasticities for space heating energy use among different income levels (IISD 2003, p. 30). Another reason why the space heating elasticity is much smaller for high income households compared to low income households is that higher income households set their indoor temperature to a lower value than lower income groups. Hence there will be more reluctance for higher income groups to reduce temperature even more even if the energy price increases (IISD 2003, p. 31). Table 7. Price Elasticities of output energy. Income level

Appliance and

Water Heating

Space Heating

lighting Low

-0.49

-0.38

-0.47

Medium

-0.39

-0.36

-0.37

High

-0.32

-0.34

-0.29

Source: IISD 2003, p. 30.

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This IISD study also found that there was a significant rebound51 effect with respect to the efficiency of furnaces and water heaters. The IISD used this rebound effect information to design a policy that could compensate lower-income groups for increases in energy prices (IISD 2003, p. 1). IISD used CREEDAC’s 1999 price elasticities of demand for energy use, and selected 440 households from the 569 CREEDAC household data-set (see paragraph 3.3.) with seven provinces represented: Newfoundland, New Brunswick, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia (IISD 2003, p. 19). The IISD concluded that, from a climate change perspective, a price increase may not be the optimal policy choice because the group that will respond most positively with energy demand reductions is the group that can contribute the least in terms of quantity: the low incomes (IISD 2003, p. 35). Moreover, if a price increase would be considered, it is important to help the lower incomes adjust because these will be hit disproportionately harder by an energy price increase than higher-income households (see page 17). The IISD suggest three forms of compensation for the lower incomes: 1) lump sum payments: In the year 2000, the Federal Government gave a lump sum payment of CAD $125 to all low-income individuals, or CAD $250 for low-income families as a result of energy price increases (IISD 2003, p. 35). 2) Targeted subsidies for more efficient furnaces: These are subsidies for low-income groups regarding the purchase of more efficient gas furnaces. In general, low-income groups hold less efficient furnaces (IISD 2003, p. 36). With use of a more efficient furnace, overall energy use will decrease, even though the rebound effect might cause an increase in energy use for space heating (see page 18). The more efficient furnace contributes toward reducing the impact of an energy price increase on low-income groups (IISD 2003, p. 36).

51

The rebound effect (also called the ‘feedback effect’ or ‘take back effect’) can be described as an increase in demand for energy services caused by an energy efficiency improvement, hence reducing potential energy conservation gains (IISD 2003, p. 11). If the efficiency of a furnace is increased, for example, less energy is needed to maintain the same temperature in the house. However, a household can now also decide to increase its average indoor temperature while still experiencing a lower energy bill than before the energy efficiency improvement took place (IISD 2003, p. 11, 12). This rebound effect can happen due to the fact that, if the price elasticity of electricity demand for furnaces is non-zero and negative, demand for electricity will go up if the price goes down. An energy efficiency improvement could be experienced to be equivalent as a price reduction in electricity, hence an increase of electricity demand can be the result.

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3) Targeted subsidies for the utility price: Direct subsidies for low-income households regarding the utility price can be introduced. Only lowincome households that are affected by a price increase for a space heating fuel should be compensated and the subsidy should be temporary (IISD 2003, p. 36).

A3.5

Price elasticity of gasoline demand in Canada.

Short run price elasticities of fuel demand are more inelastic than long run elasticities. The option people have in the short term in reaction to a gasoline price increase is merely to drive less. Whereas in the long term, people will have more options available such as changes in the stock of vehicles, or changes in car fuel efficiency and changes in location (Transport Canada 2003, p. 10 and 11). According to the OECD, the long term price elasticity of gasoline is -0.55 to -0.9. This study looked at 18 OECD countries including Canada, USA, Netherlands, Germany, Denmark, Norway, UK, and other countries ( OECD 2000, p.14). An other study based on OECD data decomposes the long run fuel price elasticity effect into three sources: 1) less miles driven per vehicle, 2) adjustment of vehicle stock, and 3) fuel efficiency of car stock (Transport Canada 2003, p. 37). This study concludes that a reduction in fuel demand as a response to a fuel price increase in the long term will be divided as follows: 57% of fuel efficiency improvements, 29% of less miles driven per vehicle, and 14% adjustment of the vehicle stock (ibid.). An analysis of four Canadian studies concluded that the long run price elasticity of motorists’ gasoline demand falls between –0.73 to –1.07 (Transport Canada 2003, p. 36). This shows that Canada’s long run price elasticities are higher than the OECD results. Another study found the short run price elasticity of demand for gasoline to be -0.4 to -0.6, and the long run elasticity -0.5 to -0.7 in Southern California and Connecticut (Sipes 2001). Because demand for gasoline is relatively inelastic in Southern California and Connecticut, the introduction of a gasoline tax might not be sufficient to achieve significant pollution reduction targets unless the environmental tax is set very high (Sipes 2001). A study from 1999 shows that a gasoline tax of $1.26 per gallon would have been needed to meet the Kyoto targets in the US for example (Agras 1999). Such a tax would have almost doubled the price of gasoline (Ibid.).

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Moreover, if a gasoline tax is considered, gasoline prices must rise faster than the rate of income growth in order to be able to reduce gasoline demand. This is due to the fact that the absolute value of the income elasticity for gasoline demand is higher than that for the price elasticity of gasoline demand (Transport Canada 2003, p. 30). In addition to a more moderate environmental tax, other policy measures should be used to help reduce environmental pollution due to gasoline use. CAFÉ standards (Corporate Average Fuel Efficiency standards) require an automotive manufacturer in the US to meet sales weighted minimum fuel efficiency standards for each model year on light-duty vehicles sold. Fines for violating CAFÉ standards are $55/mpg per vehicle sold. The problem with using CAFÉ standards is that they only apply to light duty vehicles, and most people in the US spend $10-$20,000 dollars more to buy large or high performance vehicles (Agras 1999).

A3.6

Price elasticity of vehicle demand in the USA.

According to broad consensus in the econometric literature, price elasticity of demand for vehicles as a whole is approximately –1.0 (Greene 2000 p. 19). The Energy Information Administration (EIA) in the USA has developed their own price elasticities of demand by size class for new vehicle sales (see table 8). These elasticities are much larger than the average consensus elasticity for vehicle demand as a whole of –1.0 mentioned above. This is not surprising because empirical evidence supports that choices among makes and models of cars are highly price elastic. General price elasticities of –2.8 and –3.0 were found for vehicle demand if make and model choice were taken into account (Greene 2000, p. 8). An other study found that own price elasticities of demand for car classes (i.e. compact, midsize, luxury) ranged from –1.7 to –3.4 and average elasticities for carlines within segments ranged from –2.4 to –4.7. An other study found own price elasticities of 1990 carlines ranging from –3.1 to –6.7 (Greene 2000, p. 8).

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Table 8. Price elasticity of demand by size class and vehicle group. Domestic

Import

Vehicles

Mini Subcompact Compact Midsize Large 2-Seater

-4.0884 -3.2857 -3.419 -4.1799 -4.7121 -4.0884

-3.0271 -3.6797 -4.0319 -5.1524 -4.7121 -3.0271

-3.5259 -3.5259 -4.3633 -4.3633 -1.0654 -1.0654

-2.6883 -2.6883 -4.6548 -4.6548 -1.5254 -1.5254

Light Trucks

Compact Pickup Standard Pickup Compact Van Standard Van Compact Utility Standard Utility

Source: Energy Information Administration, Department of Energy, US Government, Washington USA (John Maples: Phone: 202-586-1757 or email: [email protected]).

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Phase One research references Arthur D. Little, EIA Technology Forecast Updates, Reference Number 8675309, October 2001 (http://www.eia.doe.gov/oiaf/aeo/overview/equip_tbl.html). Berrens R., Bohara A., Jenkins H., Silva C, Weimer D., Information and effort in contingent valuation surveys: application to Global Climate Change using national USA internet samples, September 2003. Corrected Proof is in Press for the journal ‘Environmental Economics and Management’. Available online at the journal website through Science Direct under ‘articles in press’. Carr L., Mendelsohn R, Valuing Coral Reefs: A Travel Cost Analysis of the Great Barrier Reef, Yale University, School of Forestry and environmental Studies, New Haven CT, USA, November 2002. CREEDAC, Econometric Models for Major Residential Energy End-uses, by Alan S. Fung, Merih Aydinalp, V. Ismet Ugursal, April 1999, http://www.dal.ca.daltech.creedac – click on reports. CREEDAC, EnerGuide for Houses Database Analysis, April 2001, http://www.dal.ca.daltech.creedac – click on reports. Comeau J., Chapman D., Letter to the Editor, Ecological Economics 40 (2002), p. 317-320. Compas Inc. Ottawa/Toronto, The One Tonne Challenge Study, A Report to Environment Canada and Natural Resources Canada, March 2003. Environics International, Environmental Monitor 1998-2001, Willingness to Pay 10% More for Environmental Reasons. Greene D., Chin S., Alternative Fuels and Vehicles (AFV) Model Changes, Oak Ridge National Laboratory, Oak Ridge, Tennessee, prepared for the Department of Energy, November 14, 2000. Hagler Bailly Canada, Transportation Table Report, Potential for Fuel Taxes to Reduce Greenhouse Gas Emissions in Transportation, Fuel Tax Policies Report, Prepared for: Federal Government Department of Public Works and Government Services, 1999.

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IISD, Determining Demand for Energy Services: Investigation Income-driven Behaviours, by Guertin C., Kumbhakar S., Duraiappah A., International Institute for Sustainable Development Winnipeg Canada, not yet published (Copyright IISD 2003). Ipsos Reid, Albertans and the Kyoto Protocol: A quantitative Survey, Preliminary Key Findings, May 2002 (http://www3.gov.ab.ca/env/climate/actionplan/resources.html). Krupnick A., Alberini A.,Cropper M., Simon N., O’Brien B., Goeree R., Heintzelman M., Age, Health, and the Willingness to Pay for Mortality Risk Reductions: A Contingent Valuation Survey of Ontario Residents, September 2000. Leger Marketing/ Canadian Press, How Canadians Feel About Air Pollution, Montreal Quebec, 2002. Li H., Berrens R., Bohara A., Jenkins H., Silva C., Weimer D., Would Developing Country Commitments Affect US Housefolds’ Support for a Modified Kyoto Protocol?, Department of Economics at the University of New Mexico, Texas A&M University, University of Wisconsin 2002. Maritz Automotive Research Group, Cap Gemini, Ernst & Young, Green at what cost? Canadians’ Attitudes Towards Purchasing Environmentally Friendly Vehicles, 2001. Nordhaus W., Boyer J., Warming the World, Economic Models of Global Warming, The MIT Press, Cambridge Massachusetts, London, England, 2000. NREL, Utility Green Pricing Programs: What Defines Success?, by Swezey B., Bird L., September 2001 (National Renewable Energy Laboratory, US Department of Energy/TP.620.29831). NREL, Willingness to Pay for Electricity from Renewable Resources: A Review of Utility Market Research, by Farhar B., July 1999 (National Renewable Energy Laboratory US Department of Energy/TP.550.26148). Oakridge National Laboratory Tennesee, Alternative Fuels and Vehicles (AFV) Model Changes, Greene D., Chin S., Center for Transportation Analysis, November 2000.

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OECD, Working Papers, Behavioural Responses to Environmentally-Related Taxes, Vol. VIII, No. 12, p. 1-21 (2000). Oladosu G., An Almost Ideal Demand System Model of Household Vehicle Fuel Expenditure Allocation in the United States, The Energy Journal, Vol. 24, No.1 (2003), p. 1-21. Pearce D., Turner K., Economics of Natural Resources and the Environment, Johns Hopkins University Press, Baltimore, Maryland 1990, p. 141-158. Roe B., Teisl M., Levy A., Russell M., US Consumers’ Willingenss to Pay for Green Electricity, Energy Policy 29 (2001), p. 917-925. Rowlands I., Scott D., Parker P., Ready to go green? The Prospects for Premium-Priced Green Electricity in Waterloo Region, Ontario, Environments Vol. 28, No.3 (2000). Rowlands I., Scott D., Parker P., Consumers and Green Electricity: Profiling Potential Purchasers, Business Strategy and the Environment 12, p. 36-48 (2003). Sipes K., Mendelsohn R., The Effectiveness of Gasoline Taxation to Manage Air Pollution, Ecological Economics 36 (2001) p. 299-309. Sipes K., Reply to Letter to the Editor, Ecological Economics 40 (2002), p. 321-322. The Globe and Mail, Ottawa doling out $1 Billion to address Kyoto treaty, August 12, 2003, p. A4. Tinggaard Svendsen G., Daugbjerg C., Hjollund L., Branth Pedersen A., Consumers, Industrialists and the Political Economy of Green Taxation: CO2 Taxation in OECD, Energy Policy 29 (2001) p. 489-497. Transport Canada, Policy and co-ordination Branch, Economic Analysis Division, An Interpretative Survey of Gasoline Consumption Demand by Passenger Automobiles: Focus on Short and Long Run Price elasticities, by. Oum T., Basso L., Yu C., Three Stars Research Corp., Vancouver, Canada, May 2003.

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EIO, Price Responsiveness in the NEMS Building Sector Models, Energy Information Office (EIO), US Department of Energy, by Wade S., 2003.

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Appendix Two – Research Phase II Focus Group Session - PIN Report Phase II Research Objective To understand consumers’ price elasticity i.e., willingness to pay in a variety of product segments such as automobiles, major appliances and home heating, for products that mitigate the potential impacts from climate change.

Phase II Research Methodology An on-line focus group was conducted on Wednesday August 20, 2003 from 7.30pm to 9.30pm (EDT). Eleven participants were recruited from the Public Interest Network, and screened for: •

Prior involvement in consumer issues (an expert panel was not desirable)

•

Homeownership (real experience in purchasing decisions)

•

Past or intended purchase of a vehicle or appliance within 12 months (replication of the purchasing thought process)

There were ten participants. One left the group part way through the session. Participants signed on using passwords, and were known by their first names only. They received some instruction on the use of the software while in the ‘waiting room’, and technical help was available to them throughout the session. An experienced on-line moderator using a prepared discussion outline moderated the group. There were four observers, who could talk with each other and with the moderator, but not be seen by the participants.

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Demographics of group Gender

Male Female

5 5

Age

25 – 34 35 – 44 45 – 54 55 – 64 65+

1 1 4 2 2

Location

Ontario Manitoba Saskatchewan BC

7 1 1 1

Education

Secondary / Community college Bachelor Graduate

2

Income level