The Capitalization of Energy Efficiency: Evidence from the Housing Market

Current policies addressing the carbon externality from energy consumption in the building stock often hinge on the assumption that markets efficiently capitalize the energy performance of assets, assuming perfect information. This paper uses different identification strategies to examine the capitalization of energy efficiency in the housing market, addressing methodological shortcomings in the existing literature that may lead to inaccurate estimates. Using an instrumental variable approach, we document that a ten percent increase in energy efficiency leads to an increase in the transaction price of about 2.2 percent for an average home in the residential housing market. We confirm these findings using a repeated sales analysis. Importantly, the results indicate that the extent of capitalization of energy efficiency is not significantly affected by the reduction of information asymmetry through the presence of an energy performance certificate (EPC). Using a regression discontinuity approach, we show that consumers do not capitalize the information that is provided by EPCs. The findings in this paper provide some evidence on the efficiency of the market in pricing home energy performance, indicating that the salience of this information may obviate the need for costly certification programs.