CBA of the Home Energy Saving scheme

The SEAI has released its cost-benefit analysis of the Home Energy Saving scheme, which concludes that for every euro invested, five euros were earned. More money to the SEAI so, and the economic crisis will soon be over.

Intriguingly, the results for the HES are in sharp contrast to the evaluation of the Warmer Homes Scheme — which found that the subsidies had no statistically significant impact on behaviour — and the evaluation of the Green Homes Scheme — which found net losses.

The evaluation of the HES leaves some things to be desired. For optical reasons, it may be better to commission an independent outsider to do the evaluation. Instead, SEAI staff evaluated an SEAI programme.

The cost is assumed to equal the sum of the public and private expenditure. The HES is a price subsidy. It increases the consumer surplus, by less than the total subsidy. The net cost is the difference. Private expenditure does not enter that calculation.

The study ignores changes in producer surplus. These are probably small, if we assume that investment is displaced.

Benefits are the energy savings and the avoided carbon dioxide, . The study assumes that only 18% of the investment in energy saving would have been made without the subsidy. This is in contrast to the Greener Homes evaluation, which finds that roughly half of the investment would have been made anyway, and the Warmer Homes evaluation, which finds that almost all of the investment would have been made without the subsidy.

Energy saved and CO2 avoided are discounted at 4%. If only that were the opportunity cost of public investment.

The study accounts for the VAT paid on energy. Surprisingly, the carbon tax is omitted from the analysis. The HES subsidy is double regulation: Carbon dioxide emissions are taxed, and emission reductions are subsidized. In other sectors of the economy, there is single regulation (carbon tax, or ETS permit price). The HES subsidy thus introduces a distortion in Ireland’s CO2 abatement policy: We abate too much in home energy use and too little elsewhere. This distortion is not quantified in the study.

In sum, this CBA of the HES does not tell us much that is useful. Its conclusions are not supported.

One can assess the HES based on first principles. It is a second-best intervention: Carbon dioxide emission are regulated already. It is an inefficient intervention: It is a fixed subsidy on investment, unrelated to the emissions avoided. It may well be that the HES addresses some imperfection in the market for home improvement (e.g., constrained access to borrowing) but, if so, it is a second-best intervention in that problem too.

If the SEAI had concluded that there was a benefit of 80 cents for every euro invested, I probably would have believed them.