Publication Date

December 2014

Author(s)

Nikhil Kaza, Roberto G. Quercia

Client/Funder

Institute for Market Transformation

Residential energy efficiency can be promoted by linking it with mortgage finance, because increasing energy efficiency is not only one of the easier ways to transition to a low-carbon future, it also can lower mortgage risks.

Low-income households have a disproportionately high energy burden relative to their income, so promoting energy efficiency can be useful. With the residential sector accounting for one-fifth of U.S. energy consumption, a recent McKinsey report suggested that energy- efficiency investments in homes could produce $41 billion in annual savings.[1] Increasing residential efficiency of the housing stock would benefit both the environment and the pocketbook.

Significant barriers to adopting efficient technologies and practices exist, however, including lack of knowledge, uncertainty about the returns on investments, and split incentives. In the residential sector, financing large up-front costs is particularly difficult because home-valuation practices favor cosmetic improvements over efficiency upgrades. One way to overcome that barrier is to tie energy efficiency to the mainstream housing-finance system. Recent research shows that energy efficiency is associated with lower mortgage risks, and that could lead to a novel way to finance efficiency.