Implicit discount rates and energy efficiency gap in air conditioning: Evidence from the Chinese market

Abstract

As one of the most common adaptation or coping strategies to a warming world, air conditioning consumes a large amount of energy. While the adoption of energy-efficient air conditioners (ACs) could reduce energy consumption, it usually comes with a higher upfront cost. This paper investigates consumers’ tradeoffs between upfront (purchase) costs and future energy costs in AC purchases, using product-level data from the AC market in China for 274 cities from 2013 to 2018. The results show that the Chinese consumers are over-discounting future energy costs in AC purchases, with an implicit discount rate of 24 %, indicating the existence of energy efficiency gap in air conditioning in China. Besides, the implicit discount rates are found to be lower for consumers in cities with higher per-capita GDP, higher education, larger household size, and in southern China, and are lower for the purchases of relatively cheaper ACs. On average, over-discounting in energy costs leads to an increase in annual energy consumption by around 7.5 % and a welfare loss of 8.24 billion Yuan for Chinese AC consumers. With global warming, consumer welfare loss caused by over-discounting will increase by 69 %-104 % by mid-century in different Shared Socioeconomic Pathways (SSP) scenarios.