Designing an acceptable and fair carbon tax: The role of mental accounting

Abstract

Despite its potential for curbing greenhouse gas emissions, carbon taxation encounters strong public resistance. However, acceptability depends on how tax revenues are used. We test the hypothesis that mental accounting theory can both explain systematic patterns in citizens’ preferences, such as the support for environmental earmarking, and help design a carbon tax scheme that is both acceptable and fair. Across six experiments conducted in the United Kingdom and in France (Ntotal = 7100), we show that: (a) There is an acceptability boost when the use of tax revenues matches the tax domain thematically (e.g., allocating carbon tax revenues to green projects), as demonstrated by an interaction effect between the tax domain and the expenditure domain on the level of tax support. This result is consistent with the use of a mental accounting heuristic, by which people create mental budgets where the origin of revenues is matched thematically with their domain of use. (b) Carbon tax acceptability varies with the proportion of tax revenues earmarked for green projects. (c) A mixed carbon tax scheme, in which most revenues are earmarked for green projects and the rest is redistributed to low-income households to be spent on sustainable expenses, receives most support among the tested options. We also demonstrate the robustness of the mental accounting heuristic in two ways: by showing that the preference for environmental earmarking of carbon taxes is observed across all relevant subsections of the population, and that mental accounting also appears to shape preferences for health-related earmarking of tobacco taxes, and social-related earmarking of inheritance taxes.

Supporting carbon pricing when interest rates are higher

“…The interpretation that the public likes green spending because it seems aligned with the policy's primary objective is congruent with empirical results: in experimental settings, which included but were not limited to the specific setting of carbon taxation, strong preferences for 'matched earmarking' (i.e., where the rebates mirror the thematic category of the regulation) support the mental accounting hypothesis 17 . Generally, the belief that carbon prices are ineffective at reducing emissions has been identified as a main barrier of support 19 .…”

“…Crucial for our exposition are theories of mental accounting in psychology and behavioural economics specifically 16 . They suggest that people appraise revenue recycling methods based on what carbon pricing was explicitly designed to deliver 17 . Mental accounting posits that people create compartmentalized mental accounts for climate-relevant consumption and associated payments, and the phenomenon has been found to be highly relevant to energy decision-making and climate-friendly behaviour 18 .…”