Richard Thaler received the 2017 Nobel Prize in Economics for his pioneering work in behavioural economics. As readers of the previous issue of the TSEconomist know, behavioural economics has challenged the traditional assumptions of economics, especially the assumption that human behaviour is rational. One policy tool that has emerged from behavioural economics is the concept of a nudge, which is aimed at encouraging certain decisions or behaviours without forcing them. This tool can be useful to help lower individual’s impacts on the environment.
Indeed, we can find several examples that show the effectiveness of green nudges. The concept of nudging is still very young. It relies on the idea that positive reinforcement and indirect suggestions better affect people’s behaviour than bans and tough rules. In 2008, Richard Thaler and Cass Sunstein, a law professor from Harvard University, published their highly regarded book called “Nudge: Improving Decisions about Health, Welfare and Happiness…” and brought the topic into the focus of public attention. They described nudges as “any aspect of the choice architecture”, that influences the individual’s behaviour in a predictable way without excluding any options or altering the economic incentives drastically. Choice architecture means the way in which the different choices are presented. For example, by putting sustainably produced foods at eye level, a supermarket should expect to sell more of them.
Meanwhile, many policymakers around the world realized the practical benefits from the concept and several countries set up “nudge units” – the UK, the US, Australia, Denmark, among others. In the UK, the so-called “Behavioral Insights Team” started its work in 2010. One of the numerous projects they managed dealt with energy-efficient refurbishment of older houses. For a couple of years, the British government offered financial aid to insulate people’s lofts and to lower private energy consumption. The program failed to meet the expectations despite of the attractive subsidy. Only few house owners applied for the subsidy. The main problem was that many people didn’t want to clear out their loft. Therefore, the economic advisers from the “nudge unit” suggested the government should subsidy the loft clearance conducted by private firms as well. This change in policy led to a dramatic increase in loft insulations. The house owners also appreciated that the firms sorted out their unwanted items and passed them on to local charity shops.
One of the most popular green nudges is certainly the default option. In many situations people don’t really care intensively about their decisions and possible environmental consequences. In recent years, many service companies started sending bills by email as default. Customers, obliged to make an active choice in favour of a paper copy of the bill, tend to opt with the default. The same thing happens when people make the choice between different energy providers. Studies have shown that defining green energy as the default option moves more people to choose the green utility.
Another type of nudges uses the fact that social norms and social comparisons have a large impact on one’s own behaviour. In the US an energy provider put this idea into practice and issued bills to the customers with the additional information: “Last month you used 15 percent less electricity than your efficient neighbour.” During the period, energy usage declined by about two percent. Social norms already work when people simply perceive the local surrounding, as a person living in a dirty area with rubbish strewn streets will probably be more likely to litter.
Sometimes green nudges aim to communicate what we usually miss, to induce environmentally friendly behaviour. For example, you feel directly the pleasant effects of a warm shower, whereas the energy used is not visible. Many people also tend to underestimate the water and energy used during morning rituals. Researchers from the universities of Bamberg, Bonn and Zürich ran a large field experiment and gave participants real-time feedback on their resource consumption. A smart device measured and showed continuously the water usage, the water temperature and the energy consumption. The participants could connect the shower meter with their smartphone and share the measured values with friends. The required electricity for the devices was provided by a generator which was powered by the flowing water. The generator served also as a sensor that determined the water usage. The researchers observed a statistically significant effect of their intervention. The energy consumption dropped by around 22 percent. The study was special because the participants received the feedback at the point when they had to make the decision. In several earlier experiments, participants got only information about their past energy usage.
The preceding examples illustrate that green nudges can be very effective, simple and low-cost tool. A strong political argument, especially in times when governments have to meet strict financial targets. Regulatory instruments like Pigouvian taxes or restrictions can be very costly since you need to consider monitoring and administration costs, among others, which makes them harder to implement. Environmental regulations frequently raise concerns about fairness, whereas nudges describe “soft” interventions that are considered less painful. In many cases, it is useful to combine nudges and standard environmental instruments. For instance, nudges can persuade people to pay a certain tax or a fine. Nevertheless, there are also some critical aspects to consider so that nudges should be taken with a pinch of salt since we have little knowledge of the people’s behaviour in the long term. Maybe people will begin to understand the influence mechanisms and the manipulative effect, and the nudge might fail to reach the goal. Even if a nudge is successful in steering the individual’s behaviour in the desired direction, it might be ineffective since it creates compensation effects so that it has a much lower or no positive net impact on the environment.
Nudges are generally applied to choices that individuals make, but when it comes to problems of global pollution collective action is also necessary. In a 2011 opinion piece in the New York Times entitled “Going Green but Getting Nowhere,” Gernot Wagner criticizes the importance that we, as a society, place on individual actions to mitigate climate change. He argues that focusing on individual mitigation actions such as recycling more or using reusable bags at the grocery store (most stores in US still use plastic grocery bags), distracts from taking collective mitigation actions that could have larger impacts. Wagner argues for the need for economic incentives such as cap and trade or a carbon tax as he believes that “self-interest, not self-sacrifice, is what induces noticeable change.”
There are a couple of specific issues with focusing on individual actions to mitigate global environmental issues. First, there is the issue of leakage. When an individual decides to lower their personal carbon footprint by driving less, it doesn’t mean that the petrol he consumed will stay underground, rather it will most likely be consumed by another individual. Next, there is the psychological effect of the single action bias. Put simply, this bias occurs when an individual takes one small action to alleviate his sense of obligation to help improve environmental quality, and then does not take any further actions once the discomfort of feeling responsible for environmental harm has passed.
While there are some drawbacks to focusing on individual actions, nudges can be a useful tool to induce more environmentally friendly behaviour. While some may argue that policymakers should focus more on educating people about the consequences of their decisions, it can be less costly and more effective to change the way choices are presented. As discussed above, even just changing the default option of a choice can have an impact on a person’s decision. Educating people takes time, and there is still no guarantee that they will always take the time to consider what the impact of their decision is on the environment. Nudging allows greener choices with only a small effort from policymakers and everyday people.
By Lars Biesewig and Annie Krautkraemer