If CO₂ is directly priced through a tax, there is room for moral action, shows an experimental study by Axel Ockenfels, Peter Werner and Ottmar Edenhofer

Emissions of CO₂ can get a price in two ways: Direct pricing through a tax or setting the upper limit for CO₂ emissions with subsequent trading of emission allowances. A new study based on a scientifically controlled experiment sheds light on an aspect that has hardly been researched so far: the incentive effect of both variants on actors who want to act morally beyond their economic interests. The study shows: The direct pricing through taxes leads to significantly lower CO₂ emissions in the experiment.

The study was prepared by the economists Axel Ockenfels (WiSo Faculty's Key Research Initiative Behavioral Management Science), Peter Werner and Ottmar Edenhofer and has now been published in the renowned journal "Nature Sustainability". The paper was produced with the support of the "Center for Social and Economic Behavior" (C-SEB) of the University of Cologne and in the context of the Cluster of Excellence ECONtribute: Markets & Public Policy.

Around 1.000 students participated in the experiment for the study at the Cologne Laboratory for Economic Research. In the experiment, a simplified world of producers and policy makers is built to simulate the two variants of CO₂ pricing. In essence, it works like this: ten producers determine how much they want to produce in a competitive market, with a larger production volume resulting in more CO₂ emissions. Which producers get a chance and actually emit depends on the outcome of the competition and on so-called decision-makers. In one part of the experiment, they specify how many tons of CO₂ may be emitted in a market in total (indirect price control through quantity limitation), and in the other part, how much Euros the emission of one ton of CO₂ should cost (direct price control through tax). In the end, the producers are paid the revenue minus the emission costs in real money. A special incentive for the participants is that every tonne of CO₂ not emitted in the experiment is avoided in the real world as well, because through an environmental organisation a certificate in the EU emissions trading system is bought and shut down.

With several modifications of this experiment, the study demonstrates which motivations influence behaviour and which incentives work. As soon as the consequence of "real CO₂ emissions in the real world" is known, decision-makers allow significantly lower emissions, and producers are less committed to such permission. With the variant of directly pricing CO₂ through a tax - i.e. if the decision-makers specify a euro amount per tonne of CO₂ and not the number of tonnes permitted - the producers also emit significantly less as a result.

One reason for this is, according to the three economists, that moral conduct in limiting quantities only gives polluters in the marketplace room for more CO₂ emissions. Professor Ockenfels explains: "Direct pricing of CO₂ emissions has many advantages over indirect mechanisms in the fight against climate change. Our study adds an aspect that has often been overlooked in the past: Many people and institutions behave morally and want to contribute to climate protection unselfishly. However, if a quantity limit is imposed, the greenhouse gases that I have saved will be emitted additionally by others. In this way, many efforts are cancelled out. Direct price control does not know such mere shifts in emissions in moral behaviour."

WiSo-Professor Dr. Ockenfels heads the Centre of Excellence for Social and Economic Behaviour (C-SB) at the University of Cologne and is a member of the Cluster of Excellence ECONtribute: Markets & Public Policy, the only cluster of Excellence in the field of economics in Germany, Peter Werner is Associate Professor in Behavioural Economics at the University of Maastricht, and Ottmar Edenhofer is Director of the Berlin Climate Research Institute MCC (Mercator Research Institute on Global Commons and Climate Change) and the Potsdam Institute for Climate Impact Research (PIK).

• to the article: Pricing externalities an moral behaviour