Economists overwhelmingly favor carbon taxes and cap-and-trade over environmental regulatory standards, but voters disagree. Our new research shows that simple economic misunderstandings help explain why.
Here’s a puzzle that has frustrated economists for decades: putting a price on pollution, through a pollution tax or cap-and-trade, provides the most efficient way to cut emissions. Ninety percent of leading economists in a U Chicago poll endorsed a version of this view. Yet government enthusiasm for carbon pricing can be weak, especially when energy prices are high and salient. Most recently, as the Iran conflict roils energy markets, the EU boosted its supply of carbon allowances, weakening the centerpiece of European climate policy to provide relief on energy bills.
More broadly, rather than typically relying on pollution pricing, governments overwhelmingly instead use regulatory standards that tell power plants, cars, and factories how much they can pollute. Standards dominate most major U.S. environmental laws, many components of China’s War on Pollution, and vehicle emissions rules worldwide. Since the choice affects trillions of dollars that governments are spending to address the energy transition and pollution, understanding why standards persist is a critical question for environmental policy. The question is not new–this blog has discussed policy instrument choice for years (here, here, here, and here).
Our new paper offers an important piece of the puzzle: voters don’t think the way economic experts do. They may prefer standards because they misunderstand policies’ total costs and the allocation of these costs between power plants and customers.