Skip to main content

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

Pricing externalities and moral behaviour

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.

This is a preview of subscription content

Access options

Rent or Buy article

Get time limited or full article access on ReadCube.

from$8.99

All prices are NET prices.

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.

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.

References

  1. 1.

    Falk, A. & Szech, N. Morals and markets. Science 340, 707–711 (2013).

    CAS  Article  Google Scholar 

  2. 2.

    Bartling, B., Weber, R. A. & Yao, L. Do markets erode social responsibility? Q. J. Econ. 130, 219–266 (2015).

    Article  Google Scholar 

  3. 3.

    Kirchler, M., Huber, J., Stefan, M. & Sutter, M. Market design and moral behavior. Manag. Sci. 62, 2615–2625 (2015).

    Article  Google Scholar 

  4. 4.

    Sutter, M., Huber, J., Kirchler, M., Stefan, M. & Walzl, M. Where to look for the morals in markets? Exp. Econ. 23, 30–52 (2020).

    Article  Google Scholar 

  5. 5.

    Page, E. A. Cashing in on climate change: political theory and global emissions trading. Crit. Rev. Int. Soc. Polit. Philos. 14, 259–279 (2011).

    Article  Google Scholar 

  6. 6.

    Sandel, M. J. What Money Can’t Buy: The Moral Limits of Markets (Farrar, Strauss and Giroux, 2012).

  7. 7.

    Ostrom, E. Coping with tragedies of the commons. Annu. Rev. Polit. Sci. 2, 493–535 (1999).

    Article  Google Scholar 

  8. 8.

    Duranton, G. & Turner, M. A. The fundamental law of road congestion: evidence from US cities. Am. Econ. Rev. 101, 2616–2652 (2011).

    Article  Google Scholar 

  9. 9.

    Friesen, L. & Gangadharan, L. Environmental markets: what do we learn from the lab? J. Econ. Surv. 27, 515–535 (2013).

    Article  Google Scholar 

  10. 10.

    Plott, C. R. Externalities and corrective policies in experimental markets. Econ. J. 93, 106–127 (1983).

    Article  Google Scholar 

  11. 11.

    Sapci, O., Wood, A. D., Shogren, J. F. & Green, J. F. Can verifiable information cut through the noise about climate protection? An experimental auction test. Climatic Change 134, 87–99 (2016).

    Article  Google Scholar 

  12. 12.

    Jakob, M., Kübler, D., Steckel, J. C. & van Veldhuizen, R. Clean up your own mess: an experimental study of moral responsibility and efficiency. J. Public Econ. 155, 138–146 (2017).

    Article  Google Scholar 

  13. 13.

    Löschel, A., Sturm, B. & Vogt, C. The demand for climate protection—empirical evidence from Germany. Econ. Lett. 118, 415–418 (2013).

    Article  Google Scholar 

  14. 14.

    Diederich, J. & Goeschl, T. Willingness to pay for voluntary climate action and its determinants: field-experimental evidence. Environ. Resour. Econ. 57, 405–429 (2014).

    Article  Google Scholar 

  15. 15.

    Diederich, J. & Goeschl, T. To mitigate or not to mitigate: the price elasticity of pro-environmental behavior. J. Environ. Econ. Manag. 84, 209–222 (2017).

    Article  Google Scholar 

  16. 16.

    Löschel, A., Sturm, B. & Uehleke, R. Revealed preferences for voluntary climate change mitigation when the purely individual perspective is relaxed – evidence from a framed field experiment. J. Behav. Exp. Econ. 67, 149–160 (2017).

    Article  Google Scholar 

  17. 17.

    Lohse, J., Goeschl, T. & Diederich, J. H. Giving is a question of time: Response times and contributions to an environmental public good. Environ. Resour. Econ. 67, 455–477 (2017).

    Article  Google Scholar 

  18. 18.

    Pigou, A. C. The Economics of Welfare (Macmillan, 1920).

  19. 19.

    Coase, R. H. The problem of social cost. J. Law Econ. 3, 1–44 (1960).

    Article  Google Scholar 

  20. 20.

    Stavins, R. N. in The New Palgrave Dictionary of Economics 2nd edn (eds Durlauf, S. & Blume, L. E.) 1778–1788 (Palgrave Macmillan, 2008).

  21. 21.

    Klenert, D. et al. Making carbon pricing work for citizens. Nat. Clim. Change 8, 669–677 (2018).

    CAS  Article  Google Scholar 

  22. 22.

    Goulder, L. H. & Schein, A. R. Carbon taxes versus cap and trade: a critical review. Clim. Change Econ. 04, 1350011–1350028 (2013).

    Article  Google Scholar 

  23. 23.

    Chichilnisky, G. & Heal, G. Who should abate carbon emissions? An international viewpoint. Econ. Lett. 44, 443–449 (1994).

    Article  Google Scholar 

  24. 24.

    Weitzman, M. L. Prices vs. quantities. Rev. Econ. Stud. 41, 477–491 (1974).

    Article  Google Scholar 

  25. 25.

    Fuss, S. et al. A framework for assessing the performance of cap-and-trade systems: insights from the european union emissions trading system. Rev. Environ. Econ. Policy 12, 220–241 (2018).

    Article  Google Scholar 

  26. 26.

    MacKay, D., Cramton, P., Ockenfels, A. & Stoft, S. Price carbon — I will if you will. Nature 526, 315–316 (2015).

    CAS  Article  Google Scholar 

  27. 27.

    Weitzman, M. L. in Global Carbon Pricing: The Path to Climate Cooperation (eds Cramton, P. et al.) Ch. 8 (MIT Press, 2017).

  28. 28.

    Cramton, P., Ockenfels, A. & Tirole, J. Policy brief—translating the collective climate goal into a common climate commitment. Rev. Environ. Econ. Policy 11, 165–171 (2017).

    Article  Google Scholar 

  29. 29.

    Kornek, U. & Edenhofer, O. The strategic dimension of financing global public goods. Eur. Econ. Rev. https://doi.org/10.1016/j.euroecorev.2020.103423 (2020).

  30. 30.

    Nordhaus, W. D. To tax or not to tax: alternative approaches to slowing global warming. Rev. Environ. Econ. Policy 1, 26–44 (2007).

    Article  Google Scholar 

  31. 31.

    Cramton, P., Ockenfels, A. & Stoft, S. in Global Carbon Pricing: The Path to Climate Cooperation (eds Cramton, P. et al.) Ch. 12 (MIT Press, 2017).

  32. 32.

    Stavins, R. N. The Future of U.S. Carbon-Pricing Policy. Environ. Energy Policy Econ. 1, 8–64 (2020).

    Article  Google Scholar 

  33. 33.

    Krishna, V. Auction Theory (Elsevier, 2002).

  34. 34.

    Becker, G. M., Degroot, M. H. & Marschak, J. Measuring utility by a single-response sequential method. Behav. Sci. 9, 226–232 (1964).

    CAS  Article  Google Scholar 

  35. 35.

    Fehr, E. & Schmidt, K. M. A theory of fairness, competition, and cooperation. Q. J. Econ. 114, 817–868 (1999).

    Article  Google Scholar 

  36. 36.

    Bolton, G. E. & Ockenfels, A. ERC: a theory of equity, reciprocity, and competition. Am. Econ. Rev. 90, 166–193 (2000).

    Article  Google Scholar 

  37. 37.

    Gollier, C. & Tirole, J. Negotiating effective institutions against climate change. Econ. Energy Environ. Policy 4, 5–28 (2015).

    Article  Google Scholar 

Download references

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

Affiliations

Authors

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.

Ethics declarations

Competing interests

The authors declare no competing interests.

Additional information

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.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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

Download citation

Further reading

Search

Quick links