Nudging Effective Climate Policy Design

Abstract

This paper applies insights from behavioural economics literature to design options in climate policy in order to make suggestions on how to create and pass effective climate regulation. It posits that policymakers can have a more comprehensive toolkit for tackling climate change by utilising knowledge of flawed human behaviour. It makes three main suggestions. First, when pricing carbon, the use of policy bundling helps to counter cognitive biases such as ‘loss aversion.’ Second, financial incentives are required for clean tech and renewable energy sectors to become competitive with traditional energy markets. Third, climate policy needs to target the finance sector, particularly the banking industry, to encourage capital flow to these alternative energy markets. In this way, effective climate policy may have a nudging effect on a spectrum of decision-makers, with the net benefit of facilitating climate change mitigation and timely transition to a low-carbon global economy.

Keywords: climate change, mitigation, climate policy design, regulation, banks, finance sector, incentives, nudges, renewable energy, clean tech, markets, carbon price, tax, emissions trading, low carbon economy, behavioural economics, cognitive psychology, cognitive biases

JEL Classification: G18, G21, K32