Carbon Pricing and Consumer Myopia
When faced with making economic trade-offs between lower upfront purchase costs and lower operating costs, many consumers experience “capital bias”, a phenomenon that is tantamount to discounting future costs excessively. Consumers may therefore end up with investments that are sub-optimal on a life-cycle cost basis. Capital bias can affect the purchase of many goods that could lower greenhouse gas emissions such as electric vehicles, heat pumps, or more efficient appliances. The benecial effect of carbon pricing can be thwarted by capital bias when technology usage is price-inelastic and benecial environmental gains occur mostly at the extensive margin (replacements) rather than the intensive margin (usage). Policies other than carbon pricing may be needed to induce consumers to shift to product choices that are superior on a lifecycle cost that includes external costs from greenhouse gas emissions (or other negative externalities). This paper provides a novel theoretical micro-economic analysis of the problem coupled with an investigation about competing policy interventions. Conventional carbon pricing can be ineffective in the presence of consumer myopia, while subsidy (or penalty) schemes that influence the purchase decision can be effective especially when they are conditioned on a usage threshold and/or offer incentives proportional to usage.
There is scope for alternative policy designs that can overcome consumer myopia as a hurdle to adopting energy-ecient durable goods. The theoretical analysis is rounded out with empirical simulations focusing on electric vehicle adoption.