Economics in Action: Lecture 4
Policies to Mitigate Climate Change
Slides are based on Raj Chetty’s notes (see link here)
Youssef Benzarti (UCSB)
§ Given estimates of the costs of climate change, we can agree on targets in
terms of reducing carbon emissions or air pollution
§ What policies can we use to change human behavior to achieve these social
goals?
§ Most common policy tool: corrective taxes that increase private costs of
consumption
§ “Standard” taxes are used to raise revenue in order to fund the government and different
forms of social programs. Eg: income tax (see previous lecture)
§ Corrective taxes are used to correct certain behavior. Eg: by increasing a tax on sugary
drinks, the government can cause soda prices to increase which makes healthier
alternatives cheaper. This in turn can cause consumers to drink fewer sugary beverages.
Another example of Corrective taxes are taxes on gasoline: by artificially increasing the price
of gasoline via taxes, the government incentivizes individuals to drive less.
How Can We Mitigate Climate Change and Reduce Pollution?
§ Taxes on gasoline are one potential way to reduce gas consumption and
CO2 emissions
§ First question: are gas tax changes passed through to consumers or do just
they affect the profits of oil companies?
§ Doyle and Sampatharank (2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers) study this question using state-level gas
tax reforms and a difference-in-differences design
– Gas prices spiked above $2.00 in 2000
– IN suspended its gas tax on July 1 and reinstated it on Oct 30
– IL suspended its gas tax on July 1 and reinstated it on Dec 31
Effects of Gasoline Taxes
Summer 2000 Difference in Log Gas Prices
IL/IN vs. Neighboring States: MI, OH, MO, IA, WI
Figure 2A: Summer 2000 Difference in Log Gas Prices
IL/IN vs. Neighboring States: MI, OH, MO, IA, WI
-0.1
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-0.06
-0.04
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0
6/1/2000
6/8/2000
6/15/2000
6/22/2000
6/29/2000
7/6/2000
7/13/2000
7/20/2000
7/27/2000
Date
Log Points
Figure 2B: Fall 2000 Difference in Log Gas Prices
IN vs. Neighboring States: MI, OH, IL
-0.08
-0.06
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0
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10/1/2000
10/8/2000
10/15/2000
10/22/2000
10/29/2000
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11/12/2000
11/19/2000
11/26/2000
Dates
Log Points
Fall 2000 Difference in Log Gas Prices
IL/IN vs. Neighboring States: MI, OH, IL
Figure 2C: Winter 2000/2001 Difference in Log Gas Prices
IL vs. Neighboring States: MO, IA, WI, IN
0
0.02
0.04
0.06
0.08
1-Dec-00 11-Dec-00 21-Dec-00 31-Dec-00 10-Jan-01 20-Jan-01 30-Jan-01
Date
Log Points
Winter 2000/2001 Difference in Log Gas Prices
IL vs. Neighboring States: MI, IA, WI, IN
§ Finding: 10 cent increase in gas tax à 7 cent increase in price paid by
consumers
§ Implies that gas taxes could potentially reduce consumption of gas
§ Next question: how much less gas do people use when prices go up?
Effects of Gasoline Taxes on Gasoline Prices
§ Li et al. (2014: 2024 – Essay Writing Service | Write My Essay For Me Without Delay) generalize this approach to estimate effects of state tax
changes on demand for gas
§ Use data covering all 50 states and exploit changes in tax rates in all
states from 1966-2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers
Effects of Gasoline Taxes on Gasoline Demand
Changes in State Gas Taxes from 1987-2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers (cents per gallon)
§ $1 increase in gas tax à 17% reduction in gasoline consumption
§ Transportation sector accounts for about 1/3 of carbon emissions à
$1 increase in gas tax reduces carbon emissions by about 5%
[Davis et al. 2011]
§ For comparison, scientists predict that we need to cut CO2 emissions
by about 50% to stop increase in global temperatures
§ Lesson: gas taxes make a difference, but need very large taxes to
have a meaningful impact on climate change
Effects of Gasoline Taxes on Gasoline Demand
§ Next, consider effects of prices on electricity consumption
§ Utility company that provides service depends upon where families live:
Southern California Edison (SCE) vs. San Diego Gas and Electric (SDG&E)
§ In August 2000, SDG&E raised average electricity prices, while SCE did not
§ Compare consumption of households at the border of SCE and SDG&E:
§ If consumption of households located in SDG&E area decreases relative to SCE, that
means that an increase in electricity prices causes electricity consumption to decrease
Effect of Electricity Prices on Electricity Usage
A Spatial Discontinuity in Electric Utility Service Areas in Orange County, California
SCE
SDG&E
Changes in Consumption from July 1999 to July 2000,
by Distance from the Utility Border
SCE SDG&E
Changes in Consumption from August 1999 to August 2000,
by Distance from the Utility Border
SCE SDG&E
§ Result: consumers are very sensitive to electricity prices when change is
clearly visible
§ However, there is evidence that tiered pricing, which is a type of pricing where
marginal prices increase above a certain level of electricity consumption are
not very effective at reducing electricity consumption.
§ Why?
§ Consumers might not understand how tiered pricing works
§ Tiered pricing might not be very salient
§ This means that when designing pricing strategies aimed at reducing
consumption, the policy maker has to make sure they are simple to
understand and very salient for them to affect consumer behavior
Effects of Electricity Prices on Electricity Usage
§ Two potential alternatives to price reduction:
1. Make prices more salient to consumers using smart meters by making sure
that consumers are always informed of how much they are paying
§ Pioneering technological work in this area done by O-Power
2. Use non-price tools motivated by results in social psychology
§ Cialdini and collaborators (2007) demonstrate that social comparisons
and injunctive social norms have significant effects on electricity use
How Can We Reduce Electricity Consumption More Effectively?
Source: Schultz et al. (2007)
Effects of Social Norm Treatments on Daily Electricity Consumption Change in Electricity Usage (kWh/day)
§ Social norms treatment reduces electricity usage by about 1 kilowatt-hour per day
§ Equivalent to about a 2.5% reduction in electricity usage
§ Analogous to turning off 10 hundred-watt lightbulbs for an hour a day
§ Modest effect, but does not require charging consumers higher prices
Magnitude of Social Norm Treatment
§ OPower began mailing Home Energy Reports to millions of electricity
customers in markets across the U.S.
§ In some markets, mailings were randomly assigned, permitting experimental
estimates of causal effects
§ Allcott (2015 – Research Paper Writing Help Service) estimates impact of home energy reports for 111 markets
separately to analyze whether impacts vary across areas
Differential Effects of Social Norms Across Markets
Effects of OPower Home Energy Reports Across Utilities, by Program Start Date Reduction in Electricity Usage (%)
§ The government can help mitigate climate change by affecting prices using
corrective taxes
§ That results in an increase in price and subsequently in a decrease in consumption of goods
that are polluting
§ Firms can also help mitigate CO2 emissions by raising their prices and
making these price increases very salient.
§ Both the government and firms can use psychology (see behavioral
economics insights), without changing prices, to cause consumers to use less
energy and emit less CO2
Conclusion
