Household Willingness to Pay for Improved Energy Efficiency in the U.S. Rental Housing Market

In the United States, the built environment is responsible for nearly 37 percent of the nation’s total energy consumption and around 70 percent of its electricity use. Residential buildings account for almost 21 percent of GHGs emitted in the U.S. Approximately 30 percent of homes in the U.S. are rental units and over 98 million U.S. residents are renters. This number is expected to increase by 360,000–470,000 annually between 2010 and 2020. Therefore, successful strategies for reducing energy consumption and GHG emissions must address energy efficiency in the residential sector, including rental housing. In addition to environmental implications, residential energy inefficiency is an economic issue. Home energy costs have been rising over the last several decades. Because energy represents a significant portion of housing-related expenses, efficiency stands to play a large role in the future of housing costs for individuals and communities. In the rental housing market, the split incentive problem is often described as a barrier to more energy efficient units. Landlords must pay the upfront cost for efficiency upgrades while tenants benefit in the form of reduced utility costs. However, in recognition of this benefit, tenants may be willing to pay a premium for their rent. If tenants are willing to pay significantly higher costs for more efficient housing, incentives are not truly split. Rather, landlords and developers lack full information about their return on investment for improved energy efficiency. Conversely, if tenants are not willing to pay a premium for improved levels of energy efficiency, additional strategies will likely be needed to address the split incentive problem and reduce this market failure. Hedonic regression results using a sample of 692,846 households participating in the 2010 American Community Survey suggest that households in the U.S. rental market are not willing to pay a premium for improved energy efficiency. Therefore, the split incentive problem represents an important barrier to overcome in order to improve energy efficiency in rental housing. Additionally, results suggest that there is variation in the value tenants place on efficiency for different segments of the rental market. Households living in larger rental units are willing to pay significantly more for improved energy efficiency than residents of smaller units. As a result of variation in household willingness to pay, improving efficiency in rental housing may require different approaches for different market segments. Developing effective solutions that reduce supply side and demand side barriers to improved energy efficiency will help to align incentives and regulate behavior to provide tenants with more energy efficient rental housing. Implications and strategies for Rocky Mountain Institute’s Superefficient Housing Initiative are explored.