Role of Financial Products for Household Greenhouse Action
Prepared for the Australian Greenhouse Office by Key Economics Pty Ltd, 1998
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EXECUTIVE SUMMARY
This report, commissioned by the Australian Greenhouse Office, identifies and assesses the role of financial products in assisting to reduce greenhouse gas emissions from the residential sector.
The report documents the findings of the research and outlines options for the development of products.
For the purposes of this work residential greenhouse emissions are taken to be the emissions directly or indirectly attributable to energy use within the household. The issue of reducing greenhouse emissions is addressed principally through increased overall efficiency in fossil energy consumption. Financing the adoption of higher energy efficiency, or the increased use of renewable energy we include within the expression "energy efficiency finance".
The key stakeholders in the issue of energy efficiency finance are those whose actions or decisions will contract or expand the extent of adoption of energy efficiency assisted by access to financial products.
Householders/Consumers, financial institutions and several classes of suppliers of energy efficiency are the primary immediate primary decision-makers and stakeholders.
To the extent that it wishes to accelerate or transform energy efficiency markets government is also a stakeholder. Government is a different kind of stakeholder however. Its interest is not in relation to each specific decision, but occurs at an aggregate level, having regard to total fossil energy use and emission outcomes for the household sector.
However, although government may have a social objective in mind (cleaner air, less risk of global warming), it should not presume that individuals or firms will predominantly act with social objectives in mind. Despite the existence of genuine altruism in individuals and firms, the behaviour of individual stakeholders will be expected to remain unchanged unless some relevant new incentive, new information or new opportunity presents itself which also satisfies and advances the private goals of the primary participants. Thus primary appeals to altruism or social goals only are likely to have limited effects, unless the social goal is felt immediately and personally.
In this study we focus principally upon the specific issue of finance as a catalyst (or barrier) to the take-up of proven, commercially available products, services and technology now in the marketplace for the household sector.
Is there an artificial shortage of finance for household energy efficiency - ie are there people who have sufficient means prudently to afford to purchase energy efficiency on credit products but who are locked out for lack of appropriately structured products.
Only a tentative answer can be provided at this stage, but the answer to the above question seems to be :
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that there may well be householders whose net income after fixed commitments and energy bills would be adequate to service the loan required for an energy efficient home whereas they would not be able to service the loan on a standard home; however applying standard credit assessment to their application gives no credit for significant savings available for servicing a loan on an energy efficient home.
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that a standard means of certifying the performance of the energy efficient home (or major improvement alterations) will soon exist on a national basis for the information of consumers, together with accredited raters who can provide this service at a cost (order of $100-$150) that could be acceptable to consumers within the scale of other fees and certificates required for mortgage finance
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that, in the case of appliances, and minor retro-fitting it is possible that a case might be theoretically made for adjusting net income to service the loan (so as to qualify greater permissible debt); however the scale of energy consumption for most individual appliance purchases is lower than the scale of energy implied in the house purchase decision.
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that the transaction costs of separately identifying appliances as energy efficient at the point of sale, and qualifying them for a differentiated financial product compared with other standard appliances are likely to be too high to support an efficient differentiated financial product at the general consumer retail level.
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that reduced transaction costs for achieving a segregation of appliance sales to permit specialised financial terms might be achieved by aggregating the transactions eg to the level of an industry or a utility and ensuring transactions only involve high efficiency.
It is unlikely that energy efficient finance will develop on its own. Financial institutions do not know enough about energy efficiency investment to consider tailoring financial products for these purposes.
Recommendations for action are presented on the next steps perceived in order to progress more informed discussions with stakeholders and to refine the process for generating policy options.
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