Imagine going home and flipping a switch to turn on a light bulb. Now, imagine that on the other side of your light switch, one of two scenarios exists: the first is a “clean” world where wind turbines spin to generate electrons to power your light bulb and the other is a “dirty” world where a coal-fired power plant lumbers into operation, spewing carbon dioxide (CO2) and other pollutants into the atmosphere, to create the same level of brightness in your living room. If you were able to opt in to the “clean” world, there are several things you might experience: (1) You don’t have to sit in a dark room, (2) you and your fellow citizens benefit from reduced CO2 emissions and other air pollutants, and (3) you might feel pretty good that you are “doing your part” to help the environment.
There are many analogous examples to this type of “feel good” environmental behavior, such as driving a fuel-efficient vehicle, consuming eco-friendly products, or engaging in carbon-offsetting programs to reduce your environmental footprint. Of course, each of these types of actions comes with a monetary cost. Renewable energy tends to be more expensive than fossil fuel generation; Prii tend to be more expensive than Corollas; and the list goes on. But individuals opt in to that “clean” world each day because they value the environmental benefits associated with clean consumption—and, further, enjoy the potential private benefits from feeling good about consuming green energy and the overall cleaner environment.
Recently on this blog, RFF’s James Boyd, Carolyn Kousky, and Tim Brennan have highlighted the role of “environmental desires” in policymaking, how these desires can evolve, and how we might account for environmental preferences in making regulatory decisions. In a new RFF discussion paper, I provide a different, complementary perspective on the role of environmental preferences and how they might be utilized to create better environmental policies, focusing on how individuals might differ in that “feel good” aspect of environmentally friendly consumption.
Some people might buy a Prius because they care about the environment and others because they care about fuel economy, for example. All else equal, they are both driving clean cars but their preferences for providing a cleaner environment are different. In the paper, I restrict the conceptual example to environmental public goods that are funded entirely by individual contributions.
In this context, environmental policymakers might want to incentivize those individuals who highly value their own contributions to a clean environment, in order to induce an even cleaner environment. In doing so, environmental policies (e.g., subsidies for environmentally friendly consumption, or taxes on dirty consumption) could be designed so that society as whole obtains just the right amount of a clean environment. The problem here is that the “right” amount, of course, is difficult to define if a regulator doesn’t know exactly how much individuals value the environmental benefits that they are providing.
Enter the decades-old problem of trying to value public goods. How do we measure the benefits of environmental public policies? For the most part, economists have done an exceptional job at coming up with ways to measure how much individuals value improvements in environmental quality both empirically and conceptually. In their simplest forms, mechanisms for eliciting individuals’ true values for public goods follow a rough rubric of (1) asking individuals how much they value a public good, (2) determining a subsidy-tax scheme that is equal to the difference between an individual’s reported valuation and everyone else’s reported valuation, and (3) if the project cost is covered by the tax revenue, then the public project is implemented. As such, it is in every individual’s self-interest to report her true value of the public project.
Of course, this calculus becomes complicated when preferences over contributions to the public good are intertwined. When you drive your Prius, you and I both benefit from your provision of cleaner air. But what if I like clean air yet prefer driving, say, a “clean” diesel vehicle? I can then free ride on your provision to the public good since your private contribution creates a positive externality. Overall, this will result in a smaller amount of clean air provided than the socially optimal level.
So, how do we get from the status quo to the socially optimal level, where we would both be better off? As highlighted in my paper, a regulator can induce the socially optimal level of a “clean” environment by incentivizing private contributions. These incentives could take the form of subsidies, and their value would be identical to the external benefit from an individual’s contribution to the public good. However, I find that it is only worthwhile for individuals to report their true preferences when consumption behavior can be observed or when there is a large enough penalty for lying—which relies, in the weakest case, on the regulator being able to observe the level of total contributions to the public good.
Naturally, any government regulatory scheme that subsidizes environmentally friendly behavior involves the transfer of money (e.g., tax revenue) to individuals, a formal analysis of which I leave for a future blog post. However, it is important to note that the United States invests tens of billions of dollars on clean energy each year. So, in a case where market forces result in inefficient outcomes, perhaps allocating funds to spur consumer behavior that is in line with socially, and hence environmentally, optimal behavior is worth considering to better utilize public funds.
The bigger picture, however, is that we’re at a crossroads for environmental policy, with landmark consensus in global climate policy. Often, it seems that individual behavior is inconsequential for influencing large-scale changes in environmental quality. However, gaining a better understanding of individual behavior is a critical component of effective large-scale environmental policy design.