Climate Economics: Policies change People

“The design of climate mitigation policies relies on economic models. Our research shows that it is possible to improve such models to represent changes in preferences,” says Linus Mattauch, lead author of the paper and researcher at the Potsdam Institute for Climate Impact Research (PIK) and the University of Oxford. “Preferences represent values and habits, meaning essentially what you as an individual like and not, what you prefer to consume more of and what less. Economists typically assume you are basically born with a fixed set of values and preferences that remain that way throughout your life. It makes calculations easier – but it is a simplification from reality. And, crucially, if you assume preferences will always remain the same, real change like the transition to a decarbonised economy is harder.”

Preference changes are well documented in the past: When the negative health impacts of smoking were raised in education campaigns alongside price interventions and bans, more and more people quit smoking – economics rarely understands this as a change in preferences.

Climate policies can change people’s way of looking at things

“Carbon pricing is indispensable for delivering on climate targets,” says co-author Nicholas Stern, who published the famous 2006 Stern Review on the Economics of Climate Change. “However, if carbon pricing changes people’s preferences – and there is evidence that it does - this has implications. For example, if citizens see carbon prices as indicating purposefulness of policy in directions that they find sensible, then the response to carbon pricing could be enhanced.” They do not simply act as consumers: as citizens, they will develop low-carbon preferences, and more environmental protection could be achieved by a given tax rate.

“Another example is urban redesign,” adds Mattauch. “If a government puts in the money and makes a city’s infrastructure more bike-friendly, citizens will switch from driving to using public transport or cycling. This behaviour will stick, even in different infrastructures – bringing further benefits to the environment and their own health. Taking those benefits into account can lower the threshold for making such big investments worthwhile.”

Reducing demand-side emissions to the benefit of planet and people

One might argue that aiming for preference changes is something policies shouldn’t do. “Our short general answer to this objection is: If society does not debate how preferences are formed, they risk being shaped by and to the benefit of special interest groups rather than in a democratic way. For the enormous challenge of reducing greenhouse gas emissions drastically in the near-future, recognizing that climate policy instruments modify the preference formation process can produce better climate policies for everyone – and help advance the Intergovernmental Panel on Climate Change's recent recommendation of using demand-side measures to curb carbon emissions,” Mattauch concludes.