Subsidy free-riding is positively correlated to the development of energy efficiency in the housing stock

Abstract

Incentivizing energy-efficient retrofits in residential sectors often involves subsidies, which are aimed at lowering a building’s environmental impact. However, the effectiveness of these subsidies has been debated, particularly concerning an unintended consequence known as free-riding. Free-riders are investors who would have made energy-efficient retrofits even without the subsidy. Typically, a high prevalence of free-riding is perceived negatively from an economic perspective in terms of the impact and efficiency of a policy. However, apart from economic efficiency, it is unclear what the relation between free-riding and the progression of the buildings’ energy standards is. We employed an agent-based model to mimic a neighborhood and discovered an intriguing pattern: Areas with more free-riders actually showed advanced energy standards in their building infrastructure now and 7 years into the future. These insights enhance our comprehension of free-riding and can help policymakers take this relation into account when designing subsidy schemes.