Hello all! This is my first post (pretty exciting!) so I hope it doesn’t end up being catastrophic. I thought that I would start with something I found interesting that I read in the Economist, how the EU is using “behavioral economics” concepts for carbon pricing initiatives. I found this to be cool so I will be sharing more about it for this article. Hope you enjoy!
The European Union (EU) moved decisively in 2023 to combat climate change, amplifying its carbon pricing strategy—a policy that nestles comfortably in the realm of behavioral economics. The aim of this initiative is to reduce carbon emissions across a number of sectors, and its method is straightforward: make emitting carbon more expensive, so it becomes in both individual and corporate interest to seek out and invest in low-carbon alternatives.
The development of the EU Emissions Trading System in 2023 was a major event in climate history. The Emissions Trading System was not just an expansion of a preexisting policy, but rather a significant upgrade achieved in a relatively short time frame through a major set of reforms. The European Union made the decision to not only put a cap on emissions from more sectors, like shipping and aviation, but also to expand the reach of emissions trading into more parts of the economy. And these sectors collectively accounted for about 15 percent of total emissions.
The ETS had a significant influence on the overall economy. Revenue collected from carbon pricing was reinvested into projects that promoted sustainable energy and into social programs. This created a good-feeling loop that in no was undermining the aims of the ETS, and in very many ways bolstering them, because the sustainable energy projects and the social programs all over the EU were helping to mitigate climate change. And the working feedback loop of the ETS showed that market solutions could work.
The EU’s strategy for carbon pricing is a prime example of implementing the negative externality principle from behavioral economics. It involves putting a price on carbon emissions, which results in a financial disincentive for firms and people to behave in ways that generate pollution. The nudging effect of the carbon price works in both directions: in the low-carbon technologies direction and in the cleaner practices direction. Both are needed if the EU is to meet its 2030 and 2050 climate goals.
Furthermore, the ETS used scarcity to its advantage. It wasn’t just that businesses had to pay for the emissions they produced; they also had to reckon with the fact that the emissions trading scheme was set to become progressively tighter. And so, limited in resources and under pressure to comply with the ETS, businesses had to get clever about how to produce low-carbon energy and power the sorts of setups that use it.
The ETS’s successful growth since its inception offers a potentially potent influence over global carbon pricing. As other countries and regions try to achieve their climate targets, they have a valuable role model in the EU’s ETS. It’s no surprise that a large part of the climate club simply uses the ETS model to carve out their own carbon markets. While the ETS isn’t perfect, its ongoing evolution is still a potent influence over global carbon pricing and a valuable role model for an environmental behavioral economics “Nudge” that uses science to set effective climate policy.
I hope you enjoyed this article!
cognitivecents.com 
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