The economics of climate change with endogenous preferences

Abstract

Avoiding unmanageable climate change implies that global greenhouse gas emissions must be reduced rapidly. Carbon prices and technological development are essential to deliver such reductions. Changes in preferences, however, are rarely considered, even though other major socioeconomic transitions – such as those from reducing smoking and drink-driving – have succeeded partly because preferences have changed. This article examines the impact of climate policy-induced changes in consumers’ preferences. We show that low-carbon policies could be better designed if it is recognised that preferences can be endogenous to such policies. For instance, carbon taxes must be adjusted, if they crowd-in or -out social preferences, to achieve a given target. Further, when the urban built environment changes mobility preferences, the value of low-carbon infrastructure investments can be underestimated if such effects are ignored. Third, policy-induced changes in preferences for active travel and plant-based diets could increase the net benefits of the transition to zero emissions.