"Residential energy efficiency can benefit consumers through reduced utility bills, and support national environmental policy objectives by reducing the demand for electricity generated using fossil-fuels and reducing current strains on the electric power grid. Various policies to increase conservation and energy efficiency have been adopted since the 1970s, including tax incentives. Developing and deploying technologies that are consistent with the most efficient use of our nation's energy resources is broadly appealing. What remains unclear, however, is what set of policy tools the federal government should employ to meet energy-efficiency objectives. In 2010, 23% of total energy consumed in the United States was consumed by the residential sector (see Figure 1). Residential-sector energy use has been increasing over time, with the residential sector today consuming roughly 8% more energy in 2010 than in 2000. Residential energy use per capita, however, has remained relatively constant since the 1970s (see Figure 2). Thus, while overall demand for energy in the residential sector has increased with population growth, efficiency gains have allowed residential energy use per capita to remain relatively flat even as consumers increasingly use energy-demanding technologies. Although energy-efficiency gains have been made in recent decades, experts suggest that a large potential for increased energy efficiency in the residential sector remains. Despite this potential, concerns remain that consumers may not invest in the optimal level of energy efficiency. If this potential for enhanced energy efficiency is realized in the coming decades, residential energy use trends could change, perhaps leading to reduced residential energy use per capita over time. However, population growth may still result in continued increases in total residential energy use. This report explores one policy option for promoting residential energy efficiency: tax credits. It begins by providing an overview of the current residential energy-efficiency tax credits (appendices to this report provide a more detailed legislative history). The report then goes on to provide an economic rationale for residential energy-efficiency tax incentives, introducing the concept of 'market failures' and 'market barriers' which may lead to suboptimal or 'economically inefficient' investment in energy-efficiency technologies. That section summarizes various market failures and market barriers in the residential energy sector and outlines ways tax incentives correct them. The final sections of this report provide an economic analysis of the primary tax incentives for residential energy efficiency and briefly review various policy options."
CRS Report for Congress, R42089