Effective carbon taxes need green nudges

For effective climate policy, we need both classic and behavioural policies. Green nudges facilitate the effectiveness of a carbon tax by increasing the salience of the tax, harnessing pro-climate concerns, extending the reach of a tax by targeting behaviours directly and, importantly, increasing public acceptance of carbon taxes.

A consensus among economists is that a price on carbon in the form of a carbon tax is the key tool for reducing negative externalities such as greenhouse-gas emissions. In theory, if we implement the ‘right’ or socially optimal price, carbon taxes ought to influence businesses and consumers to take steps to reduce their tax burden, through either developing and using new technologies or reducing carbon-emitting activities.

A carbon tax works if people act rationally, in ways that minimize costs to themselves — a fundamental assumption in conventional economics. However, as several decades of research in behavioural economics has shown, people do not always behave rational.

Consumers (and business employees) do not make decisions in a vacuum. During the past 14 years, a growing literature on nudges documents how small changes in the decision environment shifts behaviour in ways that are not predicted by standard economic theory. A ‘green nudge’ is a behavioural intervention that changes the decision context to reduce negative externalities without changing economic incentives (tax or subsidy) or the choice set (regulation). Examples include defaulting consumers into green energy contracts, placing vegetarian food higher up on the menu, or physical nudges such as offering more vegetarian foods at the front of the buffet. Compared with classic nudges aimed at enhancing self-interest, green nudges rely on cognitive biases and moral concerns to nudge people away from choices that create negative externalities and costs for society, and towards improving societal welfare.

Despite the evidence of nudges successfully affecting behaviour if designed and targeted correctly^5, many economists and policymakers still do not take them seriously as policy instruments, or even suggest that they distract from serious structural policies.

We argue that there is a fundamental flaw in the reasoning that a conventional instrument, such as a carbon tax, and a behavioural instrument, such as a green nudge, are alternatives to each other in practice. A carbon tax cannot be implemented independently of the choice architecture that consumers interact with. A nudge, by definition, interacts with the available choice set, financial incentives such as prices, and legal and regulatory environment. Outside of academic research (for example, where randomized control trials often compare the effectiveness of financial incentives versus nudges and theoretical models abstract away competing contextual influences), taxes and choice architecture have combined effects on behaviour. If we want to design an effective climate policy mix, we need to consider how carbon taxes work in real-world decision-making contexts.

Here, we present several cases where a clever use of choice architecture in the form of green nudges can support a carbon tax.

Gravert, C., Shreedhar, G. Effective carbon taxes need green nudges. Nat. Clim. Chang. 12, 1073–1074 (2022). https://doi.org/10.1038/s41558-022-01515-1