Mattauch, L.; Hepburn, C.

Climate policy when preferences are endogenous – and sometimes they are

in MCC Working paper 3/2016, 01.07.2016

Arbeitspapiere , Task Force Public Economics

Policy can change people's preferences. For example, how cities are designed has an impact on future preferences about modes of transport, even after people move. We examine the normative significance of such preference formation for climate policy design, in which such effects are commonly ignored. Yet, on the long time scales that climate policy must  consider, it is likely to change preferences. We argue that this is of high relevance for the adequate evaluation of mitigation options. We further argue that the orthodox approach of addressing environmental concerns with marginal pricing and Pigouvian taxes is missing a key element. Policies that change preferences can influence the cost of carbon mitigation, and hence change the optimal carbon tax rate. As an attempt to assist in policy making with endogenous preferences, we examine alternatives to preference satisfaction for normative economics. Some new arguments for and against established positions in welfare theory are considered. We conclude that substantive welfare criteria, or perhaps a reinterpretation of the standard liberal approach to welfare as about fundamental preferences, may serve as a better guide to policy where preferences are endogenous.