Beginning at the end of the technological change process, research has consistently shown that diffusion of new, economically superior technologies is never instantaneous. A new technology is adopted at first gradually and then with increasing rapidity, until at some point its saturation in the economy is reached. The explanation for this typical path of diffusion that has most relevance for energy conservation investments is related to differences in the characteristics of adopters and potential adopters. This includes differences in the type and vintage of their existing equipment, other elements of the cost structure (such as access to and cost of labor, material, and energy), and their access to technical information. Such heterogeneity leads to differences in the expected returns to adoption and, as a result, only potential adopters for whom it is especially profitable will adopt at first.
Over time, however, more and more will find it profitable as the cost of the technology decreases, quality improves, information about the technology becomes more widely available, and existing equipment stocks depreciate. The longevity of much energy-using equipment reinforces the importance of taking a longer term view toward energy efficiency improvements—on the order of decades .
Several studies have explored the effect of energy prices and technology adoption costs on energy efficiency investments. From a policy perspective, the effect of higher energy prices can be interpreted as suggesting what the likely effects of taxes on energy use (or carbon dioxide) would be and the effects of changes in adoption costs can be interpreted as indicating what the effects of technology adoption subsidies would be. As suggested by the economic cost–benefit paradigm, these studies have found that higher energy prices increase and adoption costs decrease the extent of adoption of energy-efficient technology (for example, building basement insulation, more efficient home appliances, or more efficient industrial motors).
An additional interesting finding in this line of research is that the adoption of these technologies is more sensitive to the cost of the equipment than it is to the expected cost of energy. This implies that a policy of subsidizing the purchase of new efficient equipment may be more effective than a policy of taxing resource use, for policies that should in theory create the same magnitude of economic incentive.
There are at least three possible explanations for this divergence. One possibility is a behavioral bias that causes purchasers to focus more on up-front cost than they do on the lifetime operating costs of an investment. An alternative view is that purchasers focus equally on both, but uncertainty about future energy prices or whether they will face these costs (because they could move, for example) makes them give less weight to energy prices than they do to capital cost, which is known.
A final interpretation might be that consumers have reasonably accurate expectations about future energy use prices, and their decisions reflect those expectations, but the proxies for these expectations that are used by researchers are flawed, causing their measured effect to be smaller than their true effect. For example, studies often use current realized energy prices as a proxy for expected future energy prices. Current prices fluctuate more than expected future prices, however, leading to a downward bias in the coefficient on the energy price proxy relative to the true relationship with expected prices.
Although empirical evidence indicates that subsidies may be more effective than comparable taxes in encouraging technology diffusion, it is important to recognize some disadvantages of such subsidy approaches. First, unlike energy prices, adoption subsidies do not provide incentives to reduce utilization. Second, technology subsidies and tax credits can require large public expenditures per unit of effect, because consumers who would have purchased the product even in the absence of the subsidy still receive it.
