Pigou pushes preferences: decarbonisation and endogenous values
A significant body of literature shows that policy instruments such as carbon prices can make an important contribution to the rapid reduction of global greenhouse gas emissions. This paper explores the relationship between carbon prices and policies that change consumers’ preferences, intentionally or unintentionally. The impact of changes in consumers’ values induced by climate policy is rarely considered despite the fact that other major socioeconomic transitions – such as those from reducing smoking and drink-driving – have succeeded partly because values have changed.
The authors conclude that changes in consumers’ values induced by climate policies are arguably important for decarbonisation policy; taking these effects into account in economic models would enhance understanding of climate change mitigation policy, facilitating the transition to a low-carbon economy.
Key points for decision-makers
- The authors examine three examples in which policy affects consumer preferences: 1) the impact of carbon prices on preferences for low-carbon consumption options; 2) the impact of transport infrastructure on mobility preferences; and 3) the impact of policy on preferences for low-carbon diets and active travel.
- They then construct a model to answer two guiding questions: 1) If a carbon price has an influence on values, how does this affect Pigouvian pricing? In this context, a Pigouvian price is the price that fully corrects the damage from pollution but with the impact of prices on preferences being accounted for. 2) How should policy be changed to be more appropriate when it is recognised that it can shift low-carbon preferences and decisions through changed values?
- The authors find that, first, if carbon pricing changes consumers’ values, not merely relative prices, then the policy will be inefficient unless one accounts for that change in values: for example, if a carbon tax leads to a shift in attitudes towards more climate-friendly consumption then the tax rate can be lower than without that shift.
- Second, the value of investing in low-carbon infrastructure is higher if it increases the propensity to consume low-carbon goods over time – for example, if the urban built environment encourages the use of public transport.
- Their third finding is that a shift in values towards active travel (walking and cycling) and low-carbon diets (lower in meat) can lead to substantial health benefits. This increases the net benefits of the transition to zero emissions.
- The authors point out that they are not advocating for interventions to undermine people’s freedom to make their own choices, but they observe that policy often indirectly or directly affects values and preferences – whether we like it or not. Shifts in preferences for transport, energy and food choices could in fact protect consumers’ freedoms by reducing deaths and the adverse impacts from climate change.