Conclusion: Freeriders and the Rebound Effect

Our analysis of 2016 wood stove change-out programs shows that U.S. programs employ a variety of incentives to encourage residents to replace their old wood stoves with newer heating systems, the most popular of which are vouchers and rebates. Change-out program managers may be curious to know which incentive type is best to use, all things being equal. It is a crucial question, but difficult to answer because voucher and rebate programs offer a different set of advantages and disadvantages to the different parties involved; i.e., consumers, retailers, and program managers.  

Common sense suggests that consumers, especially lower-income consumers, would be more likely to purchase new appliances such as wood stoves if they received a voucher for an instant deduction at the register, rather than a rebate after the fact (or a tax deduction, which works in a similar way) that they must claim later. Studies and surveys have shown that consumers of renewable energy and energy efficient appliances are more likely to prefer vouchers to rebates or tax deductions and rebates or tax deductions to loans. A study on hybrid vehicle incentives by Gallagher and Muehlegger (2008) found that voucher programs created a seven-fold increase in sales as compared to income tax credit programs. But a voucher program might not always create the best outcome for the community, due to the problem of free-riders and the rebound effect.  The rebound effect is when, for example, a consumer buys a stove that is 20% more efficient, but instead of saving 20% more wood, they keep their house hotter or use the stove more often, because they like it more, and thus they only save 10% of wood.  The rebound effect can also show up on the showroom floor, when a consumer buys a larger stove than they had before because they are getting a rebate or incentive. This effect might be mitigated if the change-out program requires participating retailers to sign an agreement saying that will provide sizing advice and not sell over-sized stoves to participants.

On the other hand, retailers and installers may be less likely to want to participate in voucher programs because it usually means more paperwork for them. The retailers we heard from mentioned that they are reluctant to participate in change-out programs that require too much effort on their part, as they often do not receive too high of a sale boost from these programs—they might only close 3-4 new sales due to the high number of free-riders. Even so, most retailers we spoke to seemed to think that voucher programs they participated in were worth it as long as they were well-managed and well-designed. Change-out programs that received high marks from participating retailers include the American Lung Association’s New England program and the Western Nevada program, with its online dealer portal, managed by the Nevada Business Environmental Program at the University of Nevada, Reno. 

Stove change-out program administrators often try to accomplish several goals at once. Apart from improving ambient air quality, one of the goals might be to reduce energy use (and emissions) by improving the efficiency of the home heating system. With change-out programs, there’s the possibility that the incentives could entice more free-riders into "upsizing" their heating system, thereby increasing their net energy consumption. A study by Alberini, Gans, and Towe (2013) observed that recipients of an electric heat pump replacement program in Maryland experienced virtually no decrease in their electricity use, while residents who replaced their heat pumps on their own experienced an average 16% decline. Moreover, the authors found that the size of incentive was tied to the magnitude of the rebound effect: the higher the incentive, the lower the net energy savings, especially if the incentive was $1,000 or more. The results of this study suggest that higher stove replacement incentives may encourage more free-riders to purchase bigger heating systems than they otherwise would. 

Change-out programs have used a few strategies in an attempt to cut down on the number of free-riders. A common one is to hold the program in the off-season or summer months when people are less likely to consider upgrading their heating system. Year-round programs could consider stopping applications from September 1 to January 1 to reduce the incentive going to people who would buy anyway.  Those programs could still give the retailer $200 for any stove they recycled from one of their customers. 

Some recurring change-out programs, such as Massachusetts, purposefully do not disclose when the program will begin so that people don’t wait for the "sale," which just depresses business for retailers in months leading up to the change-out program.  Another strategy is to prioritize the distribution of vouchers or rebates to those most in need. Rebate, grant, or voucher programs that require pre-approval can set aside a portion of their budget for low-income households, households with individuals more vulnerable to air pollution, or poor air quality districts (see: Fairbanks, Alaska and Kittitas, Washington or other Washington State Department of Ecology-funded change-out programs for good examples). The downside of this is that there will be more work for administrators.