Carbon taxes and what goes on in our heads

I feel that a carbon price is higher than it needs to be because of the way we perceive things.  If we could change our perceptions then a lower carbon price could be more effective.  As it might be more politically acceptable to have a lower carbon price than a high price, this could be worth investigating.  It might be relevant for discussions of both cap and trade as well as carbon taxes or fees.

Here is an example:

If you want to use a carbon tax to get Günther to commute by train rather than take the car then the extra cost of driving imposed by the carbon tax should be at least equal to the “losses” of taking the train.  Some such losses could include the loss of comfort and time.

If you look at those losses there are some different types.  There is an actual loss – the 15 minutes extra time it takes to go by train.  Then there is a perceived loss – Günther feels that it will take 25 minutes longer by train even though in fact it only takes 15 minutes longer.  And then there are losses which you can absorb or tolerate: the journey might take 15 minutes longer but Günther actually discovers that he doesn’t really mind 10 minutes of those.

On the face of it Günther needs the carbon price to compensate for the full 25 minutes, because that is the loss which he perceives at the time of decision making.  But if we have way of closing the gap between perception and reality, we only need the carbon price to compensate for 15 minutes.  Advertising people would know how to close that gap.

But Günther is still making his decision based on the assumption of 15 minutes of lost time.  This is because he does not yet know that he won’t mind about 10 of those minutes.  But once he knows how delicious the sandwiches are, once he has savoured the fresh expresso or admired the lovely view … once he has caught the eye of the new girl checking tickets: the time simply flies by!  Then he only needs the carbon price to compensate for 5 minutes of loss.

So in one case you need a carbon price to compensate for 25 minutes of loss.  And in the other case – with some information and enlightenment – you only need the carbon price to compensate for 5 minutes of loss.

If we knew the relative distances between the three implied carbon prices, then we could figure out the yield from informing and enlightening people about low carbon living.  It might allow us to have a lower carbon price than we assume.

The combination of price and information can be more effective than price only.  Perhaps we can achieve the same reductions with a lower price or get more reductions for the same price.  This could make the whole thing more politically acceptable, not least because it is the headline number that people focus on politically.

 

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