Assistant professor Dylan Brewer’s analysis, published in the Journal of Urban Economics, found that renters in units where landlords pay heating expenses spend an extra $590 million a year on heating costs and create $246 million in pollution-related expenses. 

This study is the most comprehensive take on addressing energy usage in rental units where landlords pay the bill, Brewer said. It’s also the first to use microdata in a structural model to estimate the impact of landlord-paid heating bills on the U.S. economy. The analysis does not include other energy usage such as lights or air-conditioning. 

Brewer used structural modeling and looked at home sizes to get a more accurate number than previous studies. He found that 21% of the extra energy consumption in landlord-pay units is from turning up the heat. About 4% comes from tenants choosing larger apartments than they would have otherwise. Overall, this extra energy usage is called an efficiency gap — an energy-saving opportunity that is not being taken advantage of, Brewer explained. 

In this case, Brewer attributes the efficiency gap to an economic concept known as “moral hazard.”  

“When the landlord pays for heating, the renter does not face any price incentive for energy conservation — a clear form of moral hazard,” Brewer wrote in the paper. “Landlord-pay households thus choose higher thermostat settings than if they paid for heating.”  

On an individual scale, turning the heat down may only lead to a couple of dollars in savings per month. But added up across all landlord-pay units in the United States, that number reaches over $800 million in wasted money every year, including $246 million “due to the external cost of carbon dioxide emissions” via their contribution to climate change. Brewer estimated the total could range from $679 million per year on the low end to $1.261 billion per year on the high end.  

“It was surprising just how big of a problem it is on the macro scale, just because of the number of renters who have landlord-pay heating in the United States,” Brewer said. “So, it does end up being an $800 million per year problem.” 

The Census Bureau and U.S. Department of Housing and Urban Development reported there were 48.2 million rental units in the United States in 2018. About 11% of rental units in the Southeast have landlord-pay heating. That number is higher in other parts of the country, such as the Northeast, where landlords pay the heating bill for about 26% of units. 

Brewer said he is not advocating for a policy where tenants are required to pay for heating. 

“It's more of a thought exercise,” he said. “Because doing that might be costly for a number of different reasons. For example, putting individual meters in apartments is going to be expensive. And there are other kinds of trade-offs that we have to make; for example, the landlord bearing the risk of temperature fluctuations might be preferred to a tenant who's on a fixed income.” 

Now Brewer is turning his attention to data from smart thermostats and using it to understand responses to emergency events like polar vortices. “It's related, because it's looking at the economics of temperature setting, which has become a focus area of my research,” he said. 

“Equilibrium sorting and moral hazard in residential energy contracts” was published online in the Journal of Urban Economics on Jan. 5, 2022. It is available at: https://doi.org/10.1016/j.jue.2022.103424.  

Read more about Brewer’s research on his profile page, or explore more news and research from the School of Economics.