Implicit Discount Rate, Energy Labels and Investment on Energy-Efficient Products: A Review

Abstract

The implicit discount rate (IDR) is a decisive factor in household investment decisions, and its modification could promote investment in energy-saving products. However, the discussion on households’ IDR in developing countries is limited. In this regard, the current study aims to provide a detailed review of the IDR across various investment decisions, factors affecting its value, and policy instruments that can influence its value. The study finds that the IDR value tends to be considerably higher than market interest rates. Information and behavioural failures lead to a high IDR and under-investment in energy efficiency, which may be addressed through energy labels. However, the effectiveness of energy labels in addressing barriers and making energy-efficiency information visible to households depends on their visual presentation, time frame (annual or lifetime), units of measurement (physical or monetary), and the content of the information. The review has relevance for policymaking aimed at increasing the adoption of energy-efficient options that reduce household carbon footprints and, in turn, contribute towards realizing the net-zero emissions target.

Keywords

• Energy-efficient products
• Investment decision
• Inter-temporal choices
• Implicit discount rate
• Energy labels