On Dynamic Standards for Energy Efficiency in Differentiated Duopoly

We consider a two-period model of differentiated duopoly. Firms produce an energy-consuming good differentiated by its energy efficiency. Consumers differ by the weight they apply to energy costs when deciding which product to buy. In line with the Japanese Top Runner Program, the regulator introduces a minimum efficiency standard in period t = 2, which is fixed according to the efficiency of the product supplied by the high-efficiency firm in t = 1. We show that total energy consumption is decreasing, but the effect on welfare is ambiguous. It depends on the discount rate and the minimum weight consumers apply to energy costs. (JEL: L13, Q48, Q58)