Panel Paper: Energy Efficiency Investment Decisions: Lessons From the Heavy Duty Trucking Sector

Saturday, November 9, 2013 : 8:40 AM
Plaza II (Ritz Carlton)

*Names in bold indicate Presenter

Ann Wolverton, Heather Klemick and Elizabeth Kopits, Environmental Protection Agency
Economic theory suggests that profit maximizing firms should have an incentive to incorporate technologies into their products that are cost-effective, absent consideration of externalities.  Even in the presence of uncertainty and imperfect information – conditions that hold to some degree in every market – firms are expected to make decisions that are in the best interest of the company.  However, simple net present value calculations comparing upfront costs of fuel-saving technologies to future savings suggest this is not always the case. This puzzle has been observed in a variety of contexts and is referred to as the “Energy Efficiency Paradox.”

A growing number of empirical studies in the peer-reviewed literature examine why households may under-invest in energy efficiency. To our knowledge, far fewer studies examine whether similar undervaluation occurs on the part of industry. There are a wide variety of hypotheses that could explain the reticence of businesses to invest in seemingly cost-effective technologies. These include classic market failures (e.g., asymmetric information, split incentive problems), market barriers (e.g. transaction costs, borrowing constraints), and other factors not accounted for in a present-value calculation (e.g., uncertainty in future returns, loss aversion).

While a variety of hypotheses could explain this behavior, lack of empirical evidence on why businesses do not always invest in seemingly cost-effective energy saving technologies limits our ability to judge whether and when a given hypothesis is valid. In this paper, we explore how capital investment decisions within the heavy duty trucking sector are made for energy-efficient technologies.  Given the lack of readily available data sources, we collect information via focus groups and interviews with individuals involved in a firm’s capital investment decisions.

As expected, we find evidence of an apparent “energy efficiency paradox” in this sector. Many participants are looking for paybacks of 1 – 4 years even though they generally hold onto tractors for at least 7 years. The main reasons for this seem to be related to factors not well accounted for in present value calculations such as heterogeneity across routes and treatment of risk.  While upfront cost and fuel efficiency were recognized as important factors in an investment decision, participants also mentioned many other factors as important that are not reflected in a simple present value calculation – e.g., reliability and driver comfort. Also, the individual circumstances of a route may mean that a technology that on average is expected to yield net savings does not always do so.  This finding suggests that technologies that appear favorable based on a simple engineering analysis might not, in fact, be cost effective in all situations.  

Finally, lack of information does not seem to be a dominant factor in this sector. The participants were generally very knowledgeable with regard to the technologies available in the marketplace, and had investigated or tried many of them.  Many have electronic on-board recorders in trucks that collect data by route, driver, and for a wide variety of variables. Those without onboard recorders still often require drivers to log information after each route.