Ockenfels, A., Werner, P., Edenhofer, O.

Pricing externalities and moral behavior

in Nature Sustainability, 29.06.2020

Peer Review , Directorate

To measure how moral behaviour interacts with pricing regimes, we conduct highly controlled experiments in which trading creates pollution. We compare indirect pricing (here, a cap and trade mechanism) and direct pricing (a tax) in an otherwise equivalent setting in which ‘producers’ are incentivized to emit CO₂. ‘Judges’ decide on central trading parameters that may restrict socially harmful activities. Profit maximization predicts the same producer behaviour in either setting in the absence of regulation, yet we find a substantial share of producers refraining from emitting CO₂ at all. Although judges restrict behaviour in similar ways across mechanisms, direct pricing more effectively accommodates moral behaviour than the quantity policy.