Nudging the Needle on Environmental Regulation
March 01, 2019
What is behavioral economics anyway?
Behavioral economics, which lies at the intersection of psychology and economics, assumes that often, individuals behave irrationally, but in a manner that is predictable. The state can influence decision-making without infringing on liberty by manipulating the presentation of choices, a practice known as choice architecture. Richard Thaler, the founder of the field branded this practice of shaping behavior without coercion through the arrangement or the framing of choices as “nudging.” By leveraging the insights of this new field to influence consumers, regulators can incentivize firms to adopt more sustainable practices.
Nudging has been shown to promote environmentally friendly decisions from consumers. In a 2011 article published in the American Economic Review, Ferraro and Miranda found that consumers drastically reduced their own water consumption when they were made aware of their neighbors’ consumption levels. In a similar study, Ferraro and Miranda studied randomized consumers that were given different information on how to lower their water consumption. Surprisingly, giving technical advice on lowering water consumption only had a nominal impact on reducing waste. The difference in results between these studies demonstrates the power of employing behavioral economics. The researchers from the Ferraro and Miranda study were able to observe lower water usage even two years after the study ended. The results are significant because they show that consumers can be influenced into to making environmentally friendly decisions. Similar practices could be used for a variety of other environmental objectives known as “green nudging.”
How Does this Work on Firms?
Most pollutants are emitted by producers. However, because nudges work to correct human decision-making, the framework is one that works best on individuals rather than directly on businesses. The goal of regulators then is to use choice architecture (using behavioral economics principles to design how choices are presented) to nudge consumer preferences toward more environmentally friendly products and practices, which in turn will influence firm actions. The logic goes that by nudging consumer demand for greener business activity, regulators can tie firm profits indirectly to emissions reductions without imposing regulations or taxes. The question then is whether empirically, firms are responsive to consumer preferences toward the environment.
Firms are Responsive to Environmental Preferences
In the early 1990’s, the EPA began launching voluntary initiatives (like Energy Star) geared toward curbing firms’ pollution levels. The idea was that companies could opt into these programs, reduce their environmental impact in some capacity, and then advertise that they were doing so. Responding to consumer demand, thousands of firms signed on to at least one of these programs and the early results were promising. The EPA hasn’t released figures on the combined impact of these voluntary programs since 2000, but at the time, they had 11,294 partnering businesses and boasted an annual reduction of 37 million metric tons of carbon dioxide: the equivalent of removing 25 million cars from the road. This is one example of a successful non-market approach to curbing pollution.
These non-market based programs were only successful because consumers felt that their missions were important. A survey conducted by the EPA found that the Energy Star label, one of the initiative’s programs, influenced the buying behavior of more than 75% of households. The results of this case suggest that not only are consumers influenced by nudges, but also that firms are willing to adjust their practices to capture these preferences.
Further evidence that firms are responsive to consumer environmental preferences is the pervasiveness of the broader phenomenon of Corporate Environmental Responsibility (CER). CER are voluntary commitments by firms to limit their environmental impact. CER activities stem exclusively from consumer demand, as these practices are, by definition, not legally required. Apart from enrolling in formal initiatives, firms practice CER in a number of ways including self-regulation, producing environmentally friendly goods, and partnering with environmental organizations. In this context, self-regulation refers to the practice of voluntarily restricting emissions or otherwise minimizing environmental impact. In 2010, approximately two-thirds of large firms in developed countries released reports concerning social responsibility. The success of Energy Star demonstrates the power of non-market intervention to nudge consumers to demand more environmentally friendly product offerings. Similar programs can be implemented so that consumers demand changes to other activities that cause pollution.
Possible Challenges for Green Nudging
Despite the large adoption of environmental responsibility policies, researchers find the results of self-policing to be mixed. Some firms are genuinely engaging in practices to help the environment, but some firms are making false or unsubstantiated claims about their efforts to reduce emissions: a practice known as greenwashing. One particularly egregious example of this is the Volkswagen case, but the practice is more widespread in more subtle instances such as products claiming to be “green” without substantiation.
A popular 2010 study conducted by TerraChoice, an environmental marketing organization, found that in an analysis of 5000 products, 95% of the environmental claims made committed at least one greenwashing offence. One ongoing example of this phenomenon is bottled water companies positioning their product as natural by labeling them with forests, mountains, etc. when in reality, plastic bottles are highly damaging for the environment. This practice may undermine the credibility of pro-environment corporate campaigns. In order for green nudging to be successful, consumers need to have accurate information. However, if false advertising regulations are enforced to limit blatant lies, then their effect on green nudging should be limited.
Additional Opportunities to Employ Choice Architecture
Opportunities for green nudging exist everywhere. One simple yet effective way of nudging consumers is through social comparisons. Many electric vehicles are already more cost effective than their conventional counterparts, thanks to extensive savings in fuel costs. However, consumers often fail to act rationally and instead disproportionately weigh present costs and ignore future savings. Implementing policies that provide non-monetary benefits for electric vehicle drivers (such as designated driving lanes or parking spots) are often cheaper and more effective than market-based policies. Rather than banning certain vehicles or investing in expensive subsidies, policymakers can alter the choice architecture of consumers by providing such social benefits. By creating a public and easily perceivable difference between those who choose electric vehicles and those that don’t, such policies nudge consumers into making more environmentally conscious decisions. Ultimately, the introduction of new driving lanes or preferred parking spots does not coerce consumers into purchasing electric vehicles. Rather, it harnesses the power of behavioral economics to create cheaper, non-market interventionist solutions for environmental policy problems.
Nudging is gaining popularity in public policy. Because nudges inflict low financial, economic, and political costs while preserving freedom of choice, they appeal to actors on both sides of the political spectrum. For fiscal conservatives who value minimal government interference in markets, nudges minimize costs imposed by regulation. For liberals who lobby for climate action, nudges bring results. This low-cost advantage makes nudges politically viable as their implementation encounters relatively fewer political challenges. While even the strongest advocates for green nudging agree that they must be used in combination with traditional regulation, nudges are an appealing and politically viable way to help protect the environment.
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