For climate economics, choices can and should be considered intuitive

Consider a policy maker aware of the growing choices of a growing segment of young people in the West. How should this information be integrated with his thinking on climate policy? He may be puzzled if he looks at conventional economic analysis. Economic agents are modeled on the belief that they are updated about their use options, such as the environment or the consequences of their own health: they simply learn new information. Or they may change their habits, which they do not understand. Economists rarely assume that people modify their preferences because their underlying values ​​change.

Regarding climate change, economists have pointed out the need for proper economic control (Klenert and Hepburn 2018, Klenert and Fleurbaey 2021). However, current economic policies are insufficient to achieve global climate targets. Environmentalists stress the need for consumers to take voluntary action to reduce their carbon footprint. This suggests that conversions to Net-Zero are more likely to be successful if the value changes. However, this perspective is very different from how economists typically describe transformation into a net-zero carbon society.

Economic analysis assumes that people have specific choices for their current way of life. Avoiding some consumable items and moving towards more sustainable alternatives therefore comes at a cost. A carbon tax will reduce welfare if environmental benefits are not considered. For example, policies aimed at reducing the consumption of meat can reduce welfare if there is a strong and unchanging taste for human flesh.

However, research in behavioral economics has shown that choices cannot be fully explained by stable choices and behavioral biases, but that the social environment influences agents’ decisions. Changes in values ​​and culture can lead to lasting changes in behavior. Smoking and reuse are two examples of how attitudes have changed significantly in recent times (Nyborg et al. 2016).

A tax can change the choice through different channels. Bowles and Polania-Reyes (2012) show that taxes change the social environment where agents make their choices. In environmental policy, large Fibet schemes for low-carbon transport may increase its attractiveness through a social norm, where the underlying motivation for environmentally responsible behavior may decrease (Hilton et al. 2014). In addition, explicit peer behavior influences some cost decisions such as energy conservation, or adoption of renewable energy technologies.

Can formal economic analysis be done when choices are considered intangible?

In two recent publications, we examined climate mitigation policies, assuming that policies could change preferences. Mattauch et al. (2022), a study in the economics of climate change in collaboration with Nicholas Stern of the 2006 Stern Report, we model a cost decision between two products: low-carbon and high-carbon. We assume that policy instruments such as tax or infrastructure programs also change preferences – whether intended or not – and present effects such as shifting relative values ​​as well as shifting utility curves (Figure 1). We prove that the tax level needs to be adjusted to reach the climate target when it affects consumers’ choice of low-carbon products more (or less). We further establish that the value of investing in low-carbon infrastructure is higher when that infrastructure is shifted to low-carbon preferences. For example, citizens growing up in cities that can easily ride bikes may prefer low-carbon transportation options.

Figure 1 Easy microeconomics to shift towards less polluting costs

Comments: Adapted from Mattauch et al. (2022). Clean Good, higher cost of C can be achieved by changing its (relative) value p or by changing the utility curve or both.

Konc et al. (2021), we model consumers as socially embedded agents who make their choices under the influence of peers. Mattauch et al uses a similar structure. (2022), we show that a carbon tax has two types of effects. A first-order or immediate effect is the reduction of carbon-intensive costs through the normal price effect. A second-order or subsequent effect is a change in preferences due to cost changes in social networks. Because choices on social networks are interdependent, tax effects are enhanced by a social factor. Using calibrated simulations, we estimate that the preferred changes increase the efficiency of the carbon tax by 30% (Figure 2). This means that a tax designed to achieve a specific emissions goal can be reduced due to social multiplier effects.

Figure 2 Decreased high-carbon utilization due to carbon tax under stable and socially embedded choices

Comments: Adapted from Konc et al. (2021). We compare (orange line) and (blue line) effective taxes between fields without social interaction. The marginal impact of taxes on high-carbon spending outweighs socially embedded choices. Therefore, when we consider social interaction, the effective tax is 8 * less.

Should formal economic policy analysis really consider preferences as flexible by policy?

So far, we have shown that it is possible to model the effect of policy on choice. However, that does not resolve the question of whether it is a good idea. After all, a long tradition of economic analysis has regarded choice as extroverted. This position is often defended on the grounds that policies would otherwise become ‘patriarchal’. After all, evaluating policy-driven choice changes often forces societies and their organizations to take a position that choices are more desirable – old or new. Our short general answer to this objection is: If society does not debate how choices are formed and exercises clear democratic control over the decisions that influence them, choices are at risk of developing without clarity about what is at stake. This may shape choices to benefit special interest groups rather than society as a whole (Bowles 2016, Hoff and Stiglitz 2016). For most sociologists and public policy experts outside of economics, how values ​​should change is already a matter of great concern. Even in the welfare economy, recent contributions have led to a number of specific approaches to conducting welfare analysis with pregnancy choices, including in various decisions (Fleurbaey and Tadenuma 2014, Mattauch and Hepburn 2016, von Weizsäcker 2005).

For the future of climate policy consultation, our work aligns with a chapter in the recent assessment of the intergovernmental panel on climate change: demand-side measures can reduce carbon emissions by 40-70% (IPCC 2022: Chapter 5). A growing body of research is examining how avoiding emissions-intensive behaviors or adopting low-impact behaviors (e.g. eating animal-free protein) can be encouraged by public policy (Creutzig et al. 2022). Implementation of complementary instruments of pricing that can change the process of choice formation and, above all, increase welfare. Economists will continue to examine how social science research preferences on how to deliver a net-zero carbon economy change, whether they like it or not. To us, the economy should be part of that agenda and contribute to it with sharp tools for formal analysis and measurement of welfare effects.


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