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Pricing externalities and moral behaviour

Nature Sustainability volume 3, pages 872–877 (2020)Cite this article

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Abstract

To measure how moral behaviour interacts with pricing regimes, we conduct highly controlled experiments in which trading creates pollution. We compare indirect pricing (here, a cap and trade mechanism) and direct pricing (a tax) in an otherwise equivalent setting in which ‘producers’ are incentivized to emit CO2. ‘Judges’ decide on central trading parameters that may restrict socially harmful activities. Profit maximization predicts the same producer behaviour in either setting in the absence of regulation, yet we find a substantial share of producers refraining from emitting CO2 at all. Although judges restrict behaviour in similar ways across mechanisms, direct pricing more effectively accommodates moral behaviour than the quantity policy.

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Fig. 1: Descriptive statistics for the judges’ decisions.
Fig. 2: Descriptive statistics for the producers’ decisions.
Fig. 3: Induced and actual abatement in number of CO2 tonnes not emitted.

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Data availability

All data reported in this paper are available in the Supplementary Information.

Code availability

The data was analysed with the software Stata. A Stata do-file that allows for the replication of the analyses reported in our paper is available for download together with our dataset.

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Acknowledgements

We thank conference and seminar participants in Berlin, Cologne, Mannheim and Paderborn for valuable comments and suggestions. We thank L. Jung for excellent research assistance. Financial support of the German Research Foundation for the experiment through the research unit ‘Design & Behavior’ (FOR 1371) is acknowledged. This project also received support from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement no. 741409; the results reflect the authors’ views and the ERC is not responsible for any use that may be made of the information it contains) and from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy – EXC 2126/1– 390838866.

Author information

Authors and Affiliations

  1. University of Cologne, Center for Social and Economic Behavior (C-SEB) and Department of Economics, Cologne, Germany

    Axel Ockenfels

  2. Maastricht University, School of Business and Economics, Department of Microeconomics and Public Economics, Maastricht, The Netherlands

    Peter Werner

  3. Mercator Research Institute on Global Commons and Climate Change (MCC), Potsdam Institute for Climate Impact Research (PIK), and Technical University Berlin (TU Berlin), Berlin, Germany

    Ottmar Edenhofer

Authors
  1. Axel Ockenfels
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  3. Ottmar Edenhofer
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Contributions

A.O. devised the project. A.O. and P.W. designed the experiment with support from O.E. P.W. carried out the experiment, performed the numerical simulations and conducted the statistical tests with support from A.O., and all authors wrote the manuscript.

Corresponding author

Correspondence to Ottmar Edenhofer.

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Competing interests

The authors declare no competing interests.

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Publisher’s note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary information

Supplementary Information

Supplementary Tables 1–5, discussion, methods and references.

Reporting Summary

Supplementary Data 1

Experiment data from participants in the role of judges.

Supplementary Data 2

List and description of variables included in the dataset OWE_Data_Judges_Experiment.dta.

Supplementary Data 3

Experiment data from participants in the role of producers.

Supplementary Data 4

List and description of variables included in the dataset OWE_Data_Producers_Experiment.dta.

Supplementary Data 5

Data from the simulated market outcomes.

Supplementary Data 6

List and description of variables included in the dataset OWE_Data_Simulations_Markets.dta.

Supplementary Data 7

Stata do-file that performs all analyses on the experiment data and simulation data as reported in the paper.

Supplementary Data 8

Read-me file that describes the supplementary data files.

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Ockenfels, A., Werner, P. & Edenhofer, O. Pricing externalities and moral behaviour. Nat Sustain 3, 872–877 (2020). https://doi.org/10.1038/s41893-020-0554-1

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