Behavioural Economics and Climate Change

This content is published on behalf of the Economics Policy Research Group.

By Soyoun Won

This essay is aimed to analyse how behavioural economics can contribute to solving the climate change problem. The Alliance of Small Island States (AOSIS), including Nauru, Tuvalu and Vanuatu, are at stake of their national survival due to the rise of sea level (Vogler, 2017, p.394). The average earth temperature in January 2018 was 0.71°C (1.28°F) above the 20th century average of 12.0°C (53.6°F) (Co2 Earth, 2019). Several storms struck in France during January 2018 (NOAA, 2018). Climate change, defined by the Framework Convention on Climate Change (UNFCCC, 1992) Article 1, means “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.” Before the Industrial Revolution, carbon dioxide concentrations in the atmosphere were around 280 ppm, whereas, in 2015, it was 400 ppm due to overuse of fossil fuels and deforestation (Vogler, 2017, p.394). With the ever-rising levels of consumption and energy usage, the states` carbon emission is continuously increasing, causing deforestation, pollution and climate change. Climate change is one of the reflections of the ‘tragedy of commons’. With its characteristic, analysing global climate change and its initiatives through the lens of behavioural economics will give us an insight into this global crisis.

             Climate change is a collective result done by individuals’ excessive consumption. Even though measuring exact individual impact is almost impossible, it is important to focus on reducing individual carbon emission as a whole. One of the simple approaches that behavioural economics can give is changing the framing. Typically, when a meat-based entrée is being served, about 5 to 10 per cent will request for a vegetarian alternative. However, the organizers of the 2009 Behaviour, Energy and Climate Change Conference reversed the choices. They offered a vegetarian dish as the default option and meat as an alternative. Then 80 per cent of 700 people went for the vegetarian option. They addressed this change happened because of the different framing. (Gunther, 2009) Simply, the “framing effect” means that “the frame of reference may change according to how a particular choice is presented, and this will affect the payoff decision” (Gowdy, 2008, p.635). 

             By understanding how individuals make decisions and react to incentives through behavioural economics, we can get an idea of how to make an effective climate change policy. Several behavioural economics studies suggested that the monetary incentives might deter the cooperative behaviour on the collective good. (Frey, 1997; Frey and Oberholtzer-Gee, 1997) The studies addressed that the financial incentives can actually “crowd out feelings of civic responsibility” (Gowdy, 2008, p.639) It may discourage people to actively involve in the common good, such as climate change actions.

             Increasing consumption is one of the major causes of excessive carbon emissions. In industrialised societies, people are easily exposed to commercial advertisements and messages pushing them to buy more. (Gowdy, 2008, p.639) To avoid further climate change, cross-cultural cooperation to change individual lifestyle is strongly needed. This international cooperation should be done focusing on immediate observable action rather than distant targets. Shelling (2002) discussed the difficulty of international cooperation in common goals as in the case of the Kyoto protocol. However, he showed how international cooperation effectively achieved in the Marshall Plan right after WWII and NATO in the 1950s. He pointed out that the commitments were more likely to be made to taking certain direct actions rather than giving out distant targets. To have effective cooperation, it is important to have a certain form of social punishment mechanisms to free riders. Henrich (2006) argues that individual sacrifices for the cooperation will likely be made if they can certain that free riders will be punished. In the case of climate change, Stiglitz (2006) suggests for using the international trading system to impose penalties to free riding countries in reducing carbon emissions.

             By using behavioural economics, nudge theory, we can encourage individuals to buy renewable energy.  Even though the majority of consumers favour to use renewable energy but actually less than 3% did buy renewable energy. (Momsen and Stoerk, p.376) As energy production is the major contributor of carbon emissions, by using renewable energy instead of conventional energy reduce a huge amount of pollution.  (Shafiei and Salim, 2014) According to Momsen and Stoerk (2014), over 50% of the respondents favour energy from renewable energy. There is a clear gap between intention and action of the consumers. By using a nudge, “a slight change in the information set that an individual face when taking a decision” can help reduce this gap. (Momsen and Stoerk, 2014, p.376) Align with the previous example about changing the framing by the setting vegetarian dish as a default option, this study showed how changing the energy option frame can encourage consumers to buy renewable energy more. People tend to stick to the default option and prefer not to change the status quo because of the switching costs and loss aversion. Rubinstein (2012) stated this tendency as a default tendency. The Momsen and Stoerk (2014) study suggest the public actors implement default renewable energy contracts. For example, informing people that their region consists of 50% renewable energy and 50% conventional energy. The default contract is about using renewable energy, or they can choose a contract entirely using conventional energy. Based on this study, as people will less likely to make an active change, they will keep the default contract of using renewable energy.

             This essay analysed how behavioural economics can be used to solve climate change, especially in regards to reducing carbon emissions. It showed how different framing can impact on individual decision making and effect of financial incentive in collective goal such as climate change. It further discussed how observable direct action is more effective than distant targets. Lastly, it showed the use of the default tendency of individuals to encourage the usage of renewable energy. As we all realised the urgency of the global climate change problem, the effective usage of behavioural economics to climate change initiatives is necessary.

References
Article 1 of UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE. (n.d.). Retrieved April 03, 2019, from http://unfccc.int/cop4/conv/conv_003.htm.

Frey, B., 1997. A constitution of knaves crowds out civic virtues. Economic Journal 107, 1043–1053.

Frey, B., Oberholtzer-Gee, F., 1997. The cost of price incentives: an empirical analysis of motivation crowding out. American Economic Review 87, 746–755.

Global Warming Update. (2019). Retrieved April 06, 2019, from https://www.co2.earth/global-warming-update.

Gowdy, J. M. (2008). Behavioral economics and climate change policy. Journal of Economic  Behavior & Organization, 68(3-4), 632-644. doi:10.1016/j.jebo.2008.06.011.

Gunther, M. (2009, November 17). When Behavioral Economics Meets Climate Change, Guess What’s Coming for Dinner? Retrieved April 28, 2019, from https://www.greenbiz.com/blog/2009/11/17/when-behavioral-economics-meets climate-change-guess-whats-coming-dinner.

Henrich, J., 2006. Cooperation, punishment, and the evolution of human societies. Science 312, 60–61.

Momsen, K., & Stoerk, T. (2014). From intention to action: Can nudges help consumers to choose renewable energy? Energy Policy, 74, 376-382. doi:10.1016/j.enpol.2014.07.008.

NOAA National Centers for Environmental Information, State of the Climate: Global Climate Report for January 2018, published online February 2018, retrieved on April 7, 2019 from https://www.ncdc.noaa.gov/sotc/global/201801.

Rubinstein, A. (2012). Lecture notes in microeconomic theory: the economic agent. Princeton University Press.

Shafiei, S., & Salim, R. A. (2014). Non-renewable and renewable energy consumption and CO2 emissions in OECD countries: A comparative analysis. Energy Policy, 66, 547- 556. doi:10.1016/j.enpol.2013.10.064

Stiglitz, J., 2006. A New Agenda for Global Warming. Economists’ Voice, July.   www.bepress.com/ev.

Schelling, T., 2002. What makes greenhouse sense? Foreign Affairs 81, 2–8.

Vogler, J. (2017). “Environmental Issues”, The globalization of world politics: An  introduction to international relations. Oxford, United Kingdom: Oxford University Press. p. 385-401. doi:0198739850, 9780198739852.

The opinions expressed in this article are the author’s own, and may not represent the views of The St Andrews Economist.

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