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Aiding Decision Making to Reduce the Impacts of Climate Change

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Abstract

Utilizing theory and empirical insights from psychology and behavioural economics, this paper examines individuals’ cognitive and motivational barriers to adopting climate change adaptation and mitigation measures that increase consumer welfare. We explore various strategies that take into account the simplified decision-making processes used by individuals and resulting biases. We make these points by working through two examples: (1) investments in energy efficiency products and new technology and (2) adaptation measures to reduce property damage from future floods and hurricanes. In both cases there is a reluctance to undertake these measures due to high and certain upfront costs, delayed and probabilistic benefits, and behavioural biases related to this asymmetry. The use of choice architecture through framing and the use of default options coupled with short-term incentives and long-term contracts can encourage greater investment in these measures.

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Notes

  1. Some individuals prefer incandescent to CFL bulbs because they light up immediately and provide better lighting.

  2. In this regard, Borenstein (2012) emphasizes the need to develop cost estimates of the associated environmental and non-environmental externalities of existing technologies for generating electricity so that one can compare the use of coal and gas against renewable energy technologies—wind, solar, and biomass.

  3. Since W is irrelevant when a person is risk neutral, the expected discounted benefits from investing in flood-proofing when β = .10 is \( .01{\displaystyle \sum_{t=1}^T\left(40\kern-0em 000\right)/{(1.10)}^t} \) which exceeds $1200 when T > 3.

  4. Loss aversion should motivate more action than would be undertaken using formal models of choice such as discounted expected utility theory. Climate change is typically framed as the loss of climate conditions that are conducive to human habitation on planet earth or more concretely as the loss of features (e.g., glaciers or coral reefs) or species (e.g., polar bears) that are highly valued by many people. This insight is being used by organizations like the Natural Resources Defense Council and the World Wildlife Fund that attempt to trigger loss aversion in their solicitations for charitable donations with images of doomed species (e.g., https://www.nrdcgreengifts.org/den-defender?s_src=CKGG-NRDC-GG-A02-S.DD-GG-SE-SE-US-PLR-BO-ALL-Z00, http://www.arctichome.com/showLBE.do?id=arcticHome&type=pillar&size=3&exp=html&). However, the effect of loss aversion to motivate actions is often counteracted by other factors. For example, most people do not find the threat of such losses credible, given that it is based on scientific predictions that are abstract and temporally distant rather than being personal and imminent (Weber 2006).

  5. From a social welfare perspective it may be appropriate to make green energy the default option only if the estimated cost of carbon is sufficiently high. Borenstein (2012) calculated that residential solar would be cost competitive only on a social cost basis in the USA, if the cost of carbon dioxide emissions were greater than $316 per ton.

  6. Allcott points out that there is an unambiguous gain in consumer welfare from the OPOWER program if the treatments affect energy use by improving information or facilitating social learning about privately optimal levels of energy use. If on the other hand, the treatments affect only the moral utility of energy use (i.e., happy feeling when reducing energy use and contributing to a public good such as reduced GHG emissions, or guilt when increasing energy use), then it is not clear whether they are consumer-welfare enhancing.

  7. See Kunreuther et al. (2013b) for more details on the role that insurance can play to encourage investment in adaptation measures by utilizing formal models of choice while taking into account the features of intuitive thinking.

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Acknowledgments

Support for this research comes from the National Science Foundation (SES-1061882 and SES-1062039); the Center for Climate and Energy Decision Making through a cooperative agreement between the National Science Foundation and Carnegie Mellon University (SES-0949710); the Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the University of Southern California; the Center for Research on Environmental Decisions (CRED; NSF Cooperative Agreement SES-0345840 to Columbia University), and the Wharton Risk Management and Decision Processes Center. We thank the referees for helpful comments and Carol Heller for editorial assistance.

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  1. Wharton School, University of Pennsylvania, 3730 Walnut Street, Philadelphia, PA, 19104, USA

    Howard Kunreuther

  2. Columbia University, 3022 Broadway, 716 Uris, New York, NY, 10027, USA

    Elke U. Weber

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Correspondence to Elke U. Weber.

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Kunreuther, H., Weber, E.U. Aiding Decision Making to Reduce the Impacts of Climate Change. J Consum Policy 37, 397–411 (2014). https://doi.org/10.1007/s10603-013-9251-z

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