Why discount rates matter
Households account for 27% of the EU’s final energy use. The energy used by households largely depends on the decisions that the more than 500 Million Europeans make when purchasing energy-related technologies, from efficient light bulbs to building retrofits.
However, the investment is needed now but the savings occur in the future. When assessing the costs and benefits of insulating a home, or buying a low energy lamp, households somehow try to evaluate the future value of these investments. Although very few households make a thorough calculation, this more or less intuitive decision-making process involves implicit discount rates, which reveal households’ preferences for time and risk as well as reflecting “barriers” to energy efficiency. Thus, an implicit discount rate can be calculated based on the actual investment. Since households' willingness to wait or to take risks varies, these discount rates differ across households.
Implicit and generalised discount rates are used by policy makers when they assess which policies to choose and how ambitious they can be. Since there is scarce evidence-based knowledge of household investment behaviour, policy makers often tend to assume rather high discount rates. Another problem is that discount rates often tend to be treated as static. Thus the impact of policies are not taken into account to update the discount rates that are applied in scenario modelling. better understanding of investment behaviour will allow better – and often more ambitious – energy policy targets.