The Behavioral Effects of Carbon Taxes - Experimental Evidence

Abstract

Carbon taxes are a prominent policy instrument for decreasing the consumption of CO2-intensive goods in order to reduce the negative external effects involved in the production or consumption of such goods. A tax leads to higher consumer prices, which typically lowers consumption. However, in this paper we provide evidence from laboratory experiments that carbon taxes may be less effective than assumed because of unintended behavioral effects. Especially earmarking the revenues of a carbon tax for environmental purposes – a practice that is popular with voters and policy makers – can crowd out consumers' intrinsic motivation to avoid negative externalities. If this is the case, the tax not only increases consumer prices but also raises consumers' willingness to pay for the taxed good. This, in turn, can offset the price effect and lowers the intended consumption-reducing effect of the tax. Our results suggest that such unintended behavioral effects can be avoided by not earmarking the tax revenue.