Energy Performance Certificates and investments in building energy efficiency: A theoretical analysis

Highlights: • Energy Performance Certificates signal energy performance on housing markets. • They are expected to reduce energy use by increasing retrofitting incentives. • Our model shows ambiguous long-term impacts on the building stock. • EPCs can increase energy use and reduce retrofitting in certain circumstances. -- Abstract: In the European Union, Energy Performance Certificates (EPCs) provide potential buyers or tenants with information on a property's energy performance. By mitigating informational asymmetries on real estate markets, the conventional wisdom is that they will reduce energy use, increase energy-efficiency investments, and improve social welfare. We develop a model that partly contradicts these predictions. Although EPCs always improve social welfare in the absence of market failures other than asymmetric information, their impact on energy use and investments is ambiguous and depends both on the time horizon considered and the distribution of energy needs in the population. This implies that, in a second-best world where energy externalities are under-priced, EPCs can damage social welfare.