Bunching with Stars: How Firms Respond to Environmental Certification

• Environmental and Energy Economics Workshop
• Environmental and Resource Economics Workshop

Date and Location

Monday, September 16, 2013, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

This paper first shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy efficient products. In the US appliance market, firms offer products that bunch at the ENERGY STAR requirement, and charge a price premium for certified models. The second part of the paper performs a welfare analysis of the program with an emphasis on firms' strategic response. A model of imperfect competition where firms optimize energy efficiency and prices in response to environmental certification is estimated for the US refrigerator market. Policy simulations suggest that ENERGY STAR performs surprisingly well from the standpoint of economic efficiency, but most of the welfare gains come from firms' profits. Consumers would be better-off in a market without certification. Firms' ability to alter the product mix plays a dominant role in determining the welfare effects.