Is Environmentalism the Right Strategy to Decarbonize the World?

Abstract

We study how the supply of environmentalism, which is defined by psychic benefits (costs) associated with the purchase of high-environmental (low-environmental) qualities, affects the way firms choose their products and the ensuing consequences for the global level of pollution. Contrary to general belief, a high supply of environmentalism does not give rise to a better environmental outcome because it endows firms with more market power which they use to maximize profits. By contrast, standard policy instruments such as a minimum quality standard or the use of greener technologies leads to a better ecological footprint.

Keywords: Environmentalism, Psychic Costs and Benefits, Vertical Product Differentiation, Environmental Policy

JEL Classification: D11, L13, Q50