Working Paper: NBER ID: w4020
Authors: Kevin A. Hassett; Gilbert E. Metcalf
Abstract: We model the decision to invest in residential energy conservation capital as an irreversible investment in the face of price uncertainty. The irreversible nature of this investment means that there is a value to waiting to invest (an option value) which helps explain the low rate of conservation investment as a result of the residential energy tax credit. Simulations suggest that a tax credit of the type implemented from 1978 through 1985 will not increase conservation investment significantly. We investigate the empirical evidence on the effectiveness of credits using data from a panel data set of roughly 38,000 individual tax returns followed over a three year period from 1979-1981. Unlike previous work, we find that the energy tax credit is statistically significant in explaining the probability of investing. Our estimates suggest that increasing the federal credit by 10 percentage points would increase the percentage of households claiming the credit from 5.7% to 7.1%.
Keywords: Energy Tax Credits; Residential Conservation Investment; Public Economics
JEL Codes: H23; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Irreversible nature of investments + Uncertainty about future energy prices (Q47) | Low rates of conservation investment (Q20) |
| Energy tax credits (H23) | Likelihood of residential conservation investment (R21) |
| 10 percentage point increase in federal tax credit (H20) | Percentage of households claiming the credit (H31) |