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Consumer Behavior and Energy Taxation: Exploiting Psychological Biases in Designing a Green Tax Reform

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The psychology behind green tax efficiency

The way in which tax reform affects consumer psychology and thus consumption must be understood for green tax to efficiently curb pollution. An efficient balance must be found between the visibility, effectiveness and acceptability of excise tax.

Climate Change and Environment

One solution to the growing issue of environmental pollution is implementing green tax (tax imposed on the emission of pollutants and goods whose use pollutes). Such a tax, or fiscal signal, will hopefully curb environmentally harmful behaviour and raise awareness of emissions. The ALLEGRO project studied the effects of different tax designs on consumer psychology, searching for the design that best curbs emissions but is still accepted. Research was developed in two phases. The first phase focused on providing evidence of psychological effects preventing acceptance of green taxes, specifically how delayed benefits of taxation correlate to low support. Partners found that change doesn't occur when the negative external effects of consumption are delayed, as is the case with most environmentally consequential actions. In other words, people are less likely to see green taxes as motivation to change behaviour if they can't witness the benefits of reducing them. The second phase involved the analysis of consumers' reactions to price versus tax changes. Research showed that reaction to a gasoline tax change is, on average, about 20 % stronger than reaction to a corresponding price change. Consumers are more likely to react or alter behaviour in response to a visible change in tax as opposed to a change in tax-inclusive prices. These findings are significant as they show that the more visible the tax is, the more likely consumers are to alter behaviour or curb emissions. ALLEGRO suggests that greenhouse gas emissions would still be reduced even at a lower rate than currently suggested as long as visibility is increased. A lower green tax rate would avoid the usual consequences of effective taxation (where behaviour is altered but lacks support). It will also allow greater public support of these taxes while we wait to see the positive effects of reduced emissions.

Keywords

Green tax, consumer psychology, environmental pollution, emissions, public support

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