Modeling Heterogeneous Discount Rates and Intertemporal Inconsistency in the Adoption of Climate-Friendly Technologies

As part of a three-year project funded by the DFG, the Chair of Business Administration, specializing in Energy Economics, aims to contribute to a more realistic modeling of the energy transition.

The transformation of the energy system requires substantial investments by private households. Whether it’s a solar panel system, a battery storage system or a heat pump – every household investment decision is based on how current costs weigh up against future returns. Energy system models generally assume a uniform, exponential discount rate. However, research in behavioral economics shows that people often make decisions with a focus on the present: short-term costs are frequently overstated, while long-term benefits are underestimated. There is still very little empirical evidence to show the extent to which this present-bias affects real-world energy investments, or what consequences it has for climate protection pathways and funding instruments.

This is where the project comes in. Firstly, the two key time-preference parameters – β, the present-value factor, and δ, the long-run discount factor – are estimated jointly on the basis of actual investment data. This is based on monthly installation records for photovoltaic systems, battery storage systems, and heat pumps, as well as the rapidly evolving nature of German subsidy programs. Advance announcements of feed-in tariffs, changes to investment grants and tax relief act as natural experiments in this context. They make it possible to reconstruct how households respond to current and future financial incentives.

Secondly, the estimated behavioral parameters are fed into the open energy system model E2M2s, which is being further developed in collaboration with the University of Duisburg-Essen. This makes it possible to carry out prospective analyses of how various support mechanisms – such as one-off grants, fixed feed-in tariffs or low-interest loans – will play out up to 2050. The assessment covers alternative development pathways, system costs, CO₂ reductions and the fiscal efficiency of the funds allocated.