The social multiplier of environmental policy: Application to carbon taxation

• Published in: Journal of environmental economics and management Vol. 105; p. 102396
• Main Authors: Konc, Théo, Savin, Ivan, van den Bergh, Jeroen C.J.M.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.01.2021; Elsevier B.V
• Subjects: Business schools; Carbon pricing; Carbon taxes; Climate policy; Endogenous preferences; Externality taxation; Global temperature changes; Income distribution; Pricing; Social network; Social networks; D85; Carbon pricing; Endogenous preferences; D11; Q58; Externality taxation; H23; Social network; Climate policy; D91
• ISSN: 0095-0696; 1096-0449
• DOI: 10.1016/j.jeem.2020.102396

We analyze the effectiveness of environmental policy when consumers are subject to social influence. To this end, we build a model of consumption decisions driven by socially-embedded preferences formed under the influence of peers in a social network. This setting gives rise to a social multiplier of environmental policy. In an application to climate change, we derive Pigouvian and target-achieving carbon taxes under socially-embedded preferences. Under realistic assumptions the social multiplier is equal to 1.30, allowing to reduce the effective tax by 38%. We show that the multiplier depends on four factors: strength of social influence, initial taste distribution, network topology and income distribution. The approach provides a basis for rigorously analyzing a transition to low-carbon lifestyles and identifying complementary information and network policies to maximize the effectiveness of carbon taxation.