Consumers’ Self-Forecasts of Behavioral Changes Following Energy Price Increases

ABSTRACT - Results from a study with Austrian consumers (n=727) on their possible responses to an increase in the price of energy are reported. The objective was to learn the effects a tax on carbon dioxide (CO2) might have on the heating behavior of Austrian households. Conjoint analysis was used to derive utility values for different fuels and different responses taken in the case of an increase in energy prices. Possible responses are compared to the desired goal of such a tax, namely, a reduction in the emission of CO2. As hypothesized, consumers affected more strongly by the tax are more likely to adopt energy-saving steps. However, they are unlikely to substitute their current fuel for one less affected by the tax, if the tax rate is based on current EU proposals.

Citation:

Ulrike Stix, Oliver Koll, Hans Mnhlbacher, and Arch G. Woodside (1999) ,"Consumers’ Self-Forecasts of Behavioral Changes Following Energy Price Increases", in NA - Advances in Consumer Research Volume 26, eds. Eric J. Arnould and Linda M. Scott, Provo, UT : Association for Consumer Research, Pages: 58-62.

Advances in Consumer Research Volume 26, 1999      Pages 58-62

CONSUMERS’ SELF-FORECASTS OF BEHAVIORAL CHANGES FOLLOWING ENERGY PRICE INCREASES

Ulrike Stix, University of Innsbruck

Oliver Koll, University of Innsbruck

Hans Mnhlbacher, University of Innsbruck

Arch G. Woodside, Tulane University

[Financial support of the field survey provided by the Austrian Chamber of Commerce is gratefully acknowledged.]

ABSTRACT -

Results from a study with Austrian consumers (n=727) on their possible responses to an increase in the price of energy are reported. The objective was to learn the effects a tax on carbon dioxide (CO2) might have on the heating behavior of Austrian households. Conjoint analysis was used to derive utility values for different fuels and different responses taken in the case of an increase in energy prices. Possible responses are compared to the desired goal of such a tax, namely, a reduction in the emission of CO2. As hypothesized, consumers affected more strongly by the tax are more likely to adopt energy-saving steps. However, they are unlikely to substitute their current fuel for one less affected by the tax, if the tax rate is based on current EU proposals.

INTRODUCTION

Discussion about the introduction of an energy tax has divided policy makers and consumers in the countries of the EU. Consumers in the United Kingdom greeted the government’s idea of imposing a value-added tax on fuel with furor (Pearson 1994). The policy leaders of other countries would like to introduce an optional system with firm commitments for reducing CO2 emissionsafter 2000 (Business Europe 1995).

Considerable disagreement exists not only on the tax rate to be imposed, but also on the effect such value-added taxation will have on the behavior of consumers. Economists would predict that an increase in the price of energy will lead to a decrease in its consumption. However, experience from the 1973-74 oil-price shock tells us that price increases of up to 50% had negligible effect on short-run demand for gasoline (Willenborg and Pitts 1977). Non-economic factors may influence consumers’ decision-making at least as strongly as do economic ones. Therefore, by relying only on economic propositions of consumer behavior lawmakers focus their attention only on a few of the important bases of energy demand and away from others critical for achieving policy goals (Stern 1986).

Based on the rationale of moving from the easy-to-difficult to implement, van Raaij and Verhallen (1986) theoretically develop a sequence of economizing tactics by consumers: beginning with price (e.g., cheaper brands and stores), moving to quantity (e.g., buying/using less); moving to quality (e.g. lower quality from paying lower prices or higher quality to achieve durability); and finally, life-style (e.g., voluntary simplicity). Using "if you should have to economize" problem scenarios for ten product categories, these researchers found that consumers with high levels of product involvement, lower ages, optimistic expectations, and high social class are more likely to continue their product use but employ more diverse economizing tactics.

In a study of self-reported residential energy behaviors of 145 households in The Netherlands, van Raaij and Verhallen (1983) distinguish between behavior-related and purchase-related residential energy economizing. Purchase-related economizing requires an investment that is paid back over a certain period. Five clusters of user behaviors were identified: conservers (use less energy than the average cluster); spenders (use more energy); cool and warm clusters (use less energy than the average cluster); and finally, the average use cluster. Each of the five clusters was different on socio-demographic and attitudinal variables. Van Raaij and Verhallen (1983, p. 85), conclude that such findings "requires different strategies for changing and maintaining energy-related behaviors."

While the work of van Raaij and his colleagues is useful in providing theoretical ground for understanding likely energy economizing behaviors of consumers and residential segments, knowledge is needed from testing consumers’ responses to specific energy economizing strategies to estimate the sizes of impacts of the alternative strategies. The main purpose of the study reported here is to further the understanding of how consumers may respond to specific increases to specific sources of energy. The study is focused on consumer heating behavior and on three different dimensions of responses: substituting the currently used fuel for one less affected by a carbon tax, reducing the room temperature, or improving the efficiency of the current heating system by investing either in the heating system itself or in the building substance of the home.

HISTORICAL PERSPECTIVE

During the 1980s and 1990s climate researchers have pointed to the possibility of a global temperature rise as a result of increasing CO2 emissions. During this period of above average warm years and a series of climatic deviations made the emission of CO2 a political topic. Not only is CO2 the most widespread among the greenhouse gasesBwith 50% compared to the 22% of fluorchlorcarbonhydrogen (FCF) or 13% of methane, it also has the longest survival period in the atmosphere (i.e., 20 years) compared to 65 to 110 years for FCF and 10 years for methane.

Projections include a 62% increase in the emission of CO2 between 1987 and 2010. The target set in 1988 in Toronto by the industrial nations to reduce the level of CO2 eissions by 20% until 2005 is unlikely to be realized. So far, the European Union has only considered the imposition of a tax on fossil fuels like oil, natural gas or coal, the main producers of CO2. It is unclear if new taxes should be imposed at the point of production or at the point of consumption, or both; if they should be combined with an overall energy tax; when should they be introduced; and what consumer responses will follow their imposition.

Which tax rates will lead to the desired results is unclear since little information is available on the capital investments needed to reduce the need for fossil fuels, the speed of adjustments, the most likely substitutes for currently used fuels and the price elasticity for energy in consumer and producer sectors. This economic view includes the assumption that energy users act as "rational" economic subjects on the energy market. They react systematically to a change in prices, whereby the choice of one course of action over another is interpreted usually as a matter of deliberate decision-making, with consumers and firms trying to maximize their utilities (Witt 1991). Their preferences are considered determined and stable over time. The actual impact of an energy tax mainly depends on the price elasticity of demand. Econometrics has developed several models to measure price elasticity of energy demand and hence likely behavior of individuals based on aggregated longitudinal and cross-sectional market data (see Goodwin 1992; Oum, Water and Yong 1992).

However, these models are not based on empirically tested behavioral models. They assume that individuals react symmetrically to marginal changes in the price of energy, but studies in the cognitive area demonstrate that people react much stronger in the case of expected losses (a price increase) than they do in the case of expected gains (Kahneman and Tversky 1979). Only a small percentage of consumers is aware of energy prices, which would make an energy price increase, when not supported by consumer processing of additional information, an unsatisfactory means of reducing emissions (see Stern 1986).

Economic theory fails to predict why people would react or why they would not react to the price increase and how non-price factors influence their behavior. Relying on the economic theory alone, policy could influence consumers only by showing them cost and utility of their actions. Integrating economics and psychology, however, allows us to consider changes in preference as explanatory factors for changes in behavior (Etzioni 1992), thereby providing policy makers with another means, namely changing knowledge and attitude.

Several researchers have shown that the assumption of predictable symmetric behavior of people to an increase in prices caused by more taxation must be questioned. Attitude towards tax and hence behavior is not influenced by the actual amount of tax to be paid, but by the perception of the tax burden by the individual (Lewis 1982; Schm÷lders 1962). Therefore, a crucial step to change behavior may be changing consumer awareness of the tax they have to pay instead of just hiding it in the overall energy bill. Socio-demographic factors are likely to influence the adaptation to a change in energy prices (Dholakia, Dholakia, and Firat 1983;Pitts, Willenborg, and Sherrell 1981). In U.S. markets, older and poorer people reacted to energy price increases through reducing the amount of energy used at home and using public transportation more frequently while average and above-average affluent households did not change their behavior significantly (see Dholakia, Dholakia, and Firat 1983; Pitts, et al. 1981). Lower income classes perceive "warm rooms" as a secondary need that is strongly influenced by price and income while this view is not held among upper income classes. Since the income of Europeans has improved over the last few decades, their responses to energy price increases may be less strong than the likely greater response of decades ago.

The following study provides some evidence how Austrian households would change their heating behavior faced with an increase in the price of energy. Although 8% of Austrians consider themselves environmentally conscious, only a marginal percentage can remember acting environmentally conscious through saving energy (see Beutelmeyer, Baco, Koller, and Starmayer 1992). While an empirical-positivist research perspective was adopted in the study described in this report, an ethnoconsumerist research perspective (see Arnould and Wallendorf 1994; Venkataesh 1995) would be useful in particular for deepening our understanding of consumers’ rationales ("the culture’s point of view," Venkatesh 1995, p. 62) for performing environmentally-conscious acts. Ethnoconsumerism is the study of consumption from the point of view of the social group or cultural group being studied. Such a perspective is useful in particular useful for research on consumer behavior because of the aim is to explicate patterns of actions that are cultural and/or social (see Arnould and Wallendorf 1994). Although personal values are criteria used to select and justify actions (Grunert and Jorn 1995), the personal values alone do not necessarily affect behavior in the case of environmental consciousness (Heslop, Moran, and Cousineau 1981). Surveys include findings that only 6% of Austrians would favor the introduction of an energy tax. However, given a guarantee that the tax would be used for environmental purposes, 40% are in favor of it compared to 36% opposing it (Trend 1993). However, these studies only investigated the acceptance of a carbon tax, not the probable response of consumers. The response of consumers to such a tax should be of considerable interest to lawmakers in decisions of setting the rate, the point of taxation and the surrounding measures.

HYPOTHESES

Changing the fuel currently in use is normally not possible without an investment in the current heating system. It requires not only monetary investment, but also psychological investment since one is used to a certain fuel type. Therefore, it is unlikely that people will substitute the current fuel if the price increase is moderate. H1: Prices have to increase by 25%, compared to a price increase of 10%, before households start to prefer fuels relatively less affected by the price increase. One-time price increases or decreases below 15% have been found to have little impact on purchase intentions and purchases (see Monroe 1973).

Reducing the room temperature is technically more easy to implement. We assume that this will be the first step taken by households. Because adding clothing and reducing room temperatures requires less effort without increasing expenses, most households should first prefer moderate (less than 15%) temperature reductions over other alternatives. H2: Households will start to prefer reduced room temperatures at the lowest level of price increases. The preferred reduction is positively correlated with the extent of the price increase. Improving the building substance of a house requires monetary and psychological investment, too. Therefore, these steps will only be taken if price increases are substantial. H3: Households will only consider improving their heating system or the insulation if price increases are at least 25%. Usually improving the insulation is cheaper and easier to implement and therefore should be preferred over improving the current heating system. H4: Compared to medium and high income consumers, low income households burning wood are unlikely to change their type of fuel or to make building improvements if prices increase; they are most likely to react with a decrease in room temperature. (While the majority of low-income consumers rely on wood fuel for home heating, almost all the medium and high income earners in Austria do not.)

METHOD

Primary survey data for this study were collected from 1,017 Austrian households, representative of the Austrian population with regard to age, sex, profession, religion and city size. The interviews were conducted personally by 157 trained interviewers employed with an Austrian market research company based in Linz. The face-to-face interviews were conducted in the respondents’ homes in November and December of 1993.

Respondents were confronted with three different scenarios: Through the introduction of a tax on CO2, their current heating fuels will become more expensive, at rates of 10%, 25% and 50%. They were also informed that different fuels would be affected differently. The plan currently under review by the European Union would affect the various fuels in Austria in the following way: the price of coal would increase by 73%, gas by 37%, oil by 14%, electricity by 9% and wood by 5%. The relation between these rates would be valid for all three scenarios (i.e., if the person currently heats with gas, he is faced with a 10% price increase in Scenario 1; at the same time coal prices would increase by approximately 20%, oil by 4%, electricity by 2.5% and wood by about 1%; for the 50% price increase scenario all these values would increase fivefold). The conjoint design contained three attributes, namely: type of fuel, change of room temperature, and improvements in the building substance.

Therefore, respondents have the choice to stick with their current fuel or change to a now relatively cheaper one, keeping or reducing room temperature, and keeping the current condition of the building substance or improving itCeither by reconstructing the heating system or by improving insulation. The respondents were reminded to they would be responsible for financing or finding financial support related to improvements in their present heating system.

Using the change in room temperature rather than the actual room temperature was favored because people differ in the perception of a "normal" room temperature and therefore answers for various temperatures could not have been compared. Integrating "reconstruction of the current heating system" in the third set of alternatives was avoided due to high correlation with the first set of choices. The asymmetric 5 by 3 by 3 design of the resulting conjoint analysis implies that the first attribute, type of fuel, gains in importance relative to the latter two because it has more levels (Wittink, Krishnamurthi, and Reibstein 1989).

A full factorial design (see Green, Tull, and Albaum 1988) would encompass 45 combinations. To achieve independence among the three attributes a total of 25 configurations was necessary. For each scenario of an energy price increase, respondents were asked to remove the cards that are unrealistic for their situationBand hence cannot be valued (Mnhlbacher and Botschen 1988). Then the remaining cards were ranked by the likelihood the specific reaction would occur. Respondents therefore had to perform three exercises each, namely, for each of the three energy price increases. A total of 72% of respondents performed the conjoint analysis, the demographic distributions for this subset were representative of the Austrian population. People refusing to perform this part of the study did so mainly because of time constraints.

On the basis of the ranks partial utilities for the attribute levels were calculated. The calculation is based on monotonous analysis of variance which is built on this additive model:

U_j= SS b_pq X_pq   (1)

where:

Uj is the utility of alternative j

b_pq is the partial utility of level q for attribute p

X_pq: 1 if alternative j contains level q for attribute p, 0 otherwise.

Partial utilities are calculated in such a way that U_j approaches the rank P_j for the specific configuration. Ranks are standardized using the following condition: Z_j’ > Z_j if P_j<P_j’ (weak monotonicity).

The target criterion is to minimize the deviation between Z_j and U_j. The following formula is then used for standardizing the values of the partial utilities:

b_pqnorm = b’ _pq / SS | b _pq |    (2)

where:

b’_pq= b_pqBM_bp ;

b_pqnorm: standardized partial utility of level q for attribute p;

M_bp: mean of partial utilities for attribute p.

FINDINGS

The main findings for the three scenarios are summarized here. Gas (u=1.25 and u=1.06 respectively) is the most attractive fuel in front of oil, wood, gas and electricity (the last two change place) for both scenariosCplus 10% and plus 25%. If prices increase by 50%, however, wood (u=0.81) becomes the most attractive alternative as the relatively cheapest fuel followed by gas (u=0.12) and oil (u=0.21).

Hypothesis 1 is supported only partially, fuel prices need to rise above the 25% level before households start to prefer fuels relatively less affected by the price increaseCthe view that a 25% price increase is an inflection point for influencing change appears to be too low. Only if prices for gas and oilCcurrently making up 58% of the Austrian consumption (Bundeslastverteiler 1992)C increased dramatically (i.e., by 50%), people value wood, currently used by 19%, more positively. Electricity and coal are unattractive heating fuels in all scenarios.

Faced with a 10% increase in energy prices, people prefer keeping the current room temperature (u=0.58) over saving on their energy bills by reducing it. Even in the case of a 25% price increase no reaction (u=-0.04) is preferred over reducing room temperature by two degrees (u=-0.07). Only cofronted with a heavy price surge no reaction ranks last (u=-.28) and reductions by one or two degrees are equally attractive (u=0.13 and 0.12 respectively).

Therefore Hypothesis 2 that a reduction in room temperature is the easiest and therefore most likely reactionBeven in the case of a moderate price increaseCcan be rejected. Similar are the results in the case of building improvements. People are unlikely to respond to a 10% increase in prices (u=0.27). However, in the case of a 25% increase improving insulation becomes the most accepted alternative (u=0.20) and in the case of a 50% increase even a reconstruction of the current heating system (u=-0.11) is preferred to no response (u=-0.20).

Therefore Hypothesis 3 is accepted since people respond only if prices increase considerably and prefer improving the insulation of their houses over reconstructing the current heating system. The importance of the three attributesBtype of fuel, temperature or building improvementsBcannot be directly compared since fuel has a larger number of levels. It is the most important decision criterion in all three scenarios (52%, 82% and 56% respectively). More informative is the comparison between the two symmetric attributes: reducing the temperature is more important only in the case of a moderate price increase (33% compared to the 13% of building improvements), for the other scenarios improving their building is more relevant to the decision making of respondents: 13% in the case of a 25% price increase and 23% in the case of 50% compared to 5% and 21% respectively for the room temperature.

When dividing respondents along their currently used fuels it turns out that oil users prefer their own fuel in all scenarios, as do wood users while gas users prefer wood in the case of the largest price increase. Electricity users start to prefer gas already at an increase of 25% (u=0.72 compared to u=0.26 for electricity), they do not see wood as an alternative even in the case of a 50% increase. The utility of -0.49 is the lowest of all fuels in this scenario. Coal users are the group most prone to substitution. They would switch to wood already at a 10% price increase, not surprisingly since switching costs are minimal in the case of these two fuels.

Similar results hold for the likelihood of reducing the room temperature: Households heating with coal prefer doing so already in the case of the 10% scenario while gas and electricity users react at a 25% increase. For oil and wood users no reaction as far as room temperature is concerned is always the preferred alternative. While all groups are ready to improve their building in the case of increasing energy prices, likely reactions differ: while all groups prefer improving insulation with an increase of 25% and most groups prefer reconstructing their heating system in at least one of the two more extreme scenarios over doing nothing, wood users do not consider reconstructing their heating system. This improvement is meant for increasing the efficiency of the current heating system, something users of relatively cheap wood may not think worth the money.

Hypothesis 4 is accepted partially. As expected, the lowest income members now using wood prefer wood when confronted with a price increase of only 10% (u=0.87) while the other two income class members prefer gas (u=1.78 and 1.44, respectively). The highest income class members still prefer gas at a price increase of 50% whereas the medium income class members now switch to wood. The lowest income group is the most unlikely to improve the building substance of their residence if confronted with a CO₂ tax. However, other comparisons do not include the expected significant differences among the income groups.

CONCLUSIONS

The reported findings indicate that consumers’ likely reaction to a CO2 tax depends not only on socio-demographic factors but also on the fuel currently used. Consumers currently heating with gas ar unlikely to substitute their current fuelCmostly they do not have this possibility since they get their heat from local power stations. However, they would react by improving the insulation of their homes and by reducing their room temperature. Therefore expect energy saving steps rather than substitution for the largest segment of the Austrian population when confronted with the likely tax rate of 37% as planned by the EU.

Oil users, too, do not seem to be ready to substitute their current fuel, they are likely to save energy through improving the insulation and heating systems in their homes. People using wood are the group that is least likely to change their behavior. Since wood is by far the cheapest fuel and would also be the least affected by an energy tax, their only reaction would be to improve insulation. The same is true for electricity. Its expected price increase of only 9% is unlikely to cause a change in behavior. The situation for coal users is different. Since they are the group most affected by the price increaseBcoal prices would increase by 73%Band have no problems substituting coal with wood, they would do so even when facing only a moderate increase in prices. But they also are the first group that would invest in insulation and the improvement of their heating system.

LIMITATIONS

The validity of these results depends on the respondents’ ability to evaluate the alternatives posed by conjoint analysis. However, since the respondents that felt stretched by the card sorting task quit the interview beforehand, we can not assume that the answers of the remaining 727 persons correspond to their likely behavior.

IMPLICATIONS FOR POLICY MAKERS

For policy makers the results give some hints how effective the introduction of a carbon tax would be for the segment of households. Additional studies would be necessary to predict the effect on traffic and industrial firms. However, households are responsible for 21% of CO2 emissions in Austria (Umweltbundesamt 1992). The three biggest sectors of consumersBoil, gas and wood usersBare not likely to substitute their current fuel; they likely will take other energy saving measures if confronted with a carbon tax like the one currently contemplated by the EU. In this case it seems more sensible to introduce a pure energy tax that burdens fuels regardless of their CO2 emissions. This strategy would not only be easier to implement, but may also require consumers to take energy saving measures that have a long-run advantageous effect on the environment.

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