Scandinavia will be in the spotlight as the world’s largest energy and innovation ministerial meetings (CEM9 and MI3) take place in Malmö (Sweden) and Copenhagen (Denmark) in May 2018. Participants will no doubt be eager to learn about the Scandinavian experience in terms of green growth, clean energy, technological innovation and decarbonisation. Attendees will learn that green growth has been a policy priority in Scandinavian countries for decades, and has also been central to regional cooperation. Scandinavian countries are recognised world leaders in clean energy, innovation, policy and environmental protection, topping various international ranking systems relevant to the green energy economy policy discourse, such as the Global Green Economy Index, the Legatum Prosperity Index, the Global Cleantech Innovation Index.
In Scandinavia, behavioural economics – particularly the study of people’s economic behaviour in response to energy and decarbonisation policies – is increasingly applied in the context of green energy economy policy analysis. Drawing on insights from cognitive science, particularly psychology, behavioural economics is supporting policymaking by providing a more comprehensive explanation of the energy-climate-economic phenomena.
What have we learned from behavioural economics in the context of decarbonisation?
Policy-oriented research in behavioural economics is increasing our knowledge of micro-economic decision-making processes and value-based choices. It is unearthing the motivational, psychological and contextual factors that affect sustainable energy use and the mitigation actions of consumers. The initiatives are showing that there are untapped energy efficiency and mitigation potential on the demand side, at least in short term.
One Swedish study showed that pro-environmental behaviour and social norms need to be given greater attention. It found that willingness to purchase carbon allowances from the European Emission Trading Scheme (EU-ETS) and retire them permanently to reduce emissions is driven by social norms, in addition to price mechanisms and pro-environmental motivation. Meaning, people who feel personally responsible for reducing the impacts of climate change appear to be more inclined to buy carbon allowances when they know that others are doing the same.
A field experiment in Denmark introduced users to smart meter (SM) technology and studied loss aversion and framing. Consistent with the value function found in prospect theory, the study suggests that consumers tend to underestimate potential financial gains and overestimate potential losses resulting from electricity use. Differential effects between control and intervention groups revealed that the provision of loss-framed, salient information reduced daily demand by 7–11%, compared to unframed information.
Another experiment analysed households’ willingness to make greater efforts to save electricity in Sweden. The experiment assessed the extent to which the presentation of information influenced (stated) behaviour. The results showed that pro-environmental behaviour, costs, and the way information is presented are all significant drivers for electricity saving activities.
Research in Norway found that individuals with a higher predisposition to procrastinate are less willing to participate in energy saving activities. Importantly, it was found that procrastination can hinder the positive consequences of environmental consciousness on energy saving activities.
Another area of research concerns default settings (and the resulting framing), and reference dependence. For example, one initiative in Denmark analysed the acceptance rate for installing SM technology based on default settings. It found that the acceptance rate was significantly higher (ca. 80%) if the installation of the SM was presented as the default (i.e. customers had to opt-out) than the same option being framed as opt-in (60%) (i.e. customers had to actively choose the SM installation).
What are the main policy lessons?
Emerging knowledge about behaviour, energy use and decarbonisation is proving to be an opportunity to complement the existing mix of policy portfolios. At present, most green energy economy and decarbonisation policy mixes are dominated by market-based instruments such as taxes and subsidies, and a traditional policymaking approach. The key assumption here is that the ‘right’ price signals or ‘correct’ information will drive energy users to make ‘rational’ decisions. However, behavioural economics studies have identified ‘irrationalities’ or ‘anomalies’ on the demand side (e.g. procrastination, loss aversion, satisficing), making it clear that much more attention needs to be paid to decision-making processes, adoption and use of mitigation technologies per se. This does not mean that pricing mechanisms should be ruled out; prices still provide incentives to energy users and complement behavioural interventions. The main policy lesson is to maximise complementarities and synergies between price and non-price policy interventions.
Behavioural interventions are not a panacea for a green energy economy transition, they must be complemented by other ambitious policy instruments. Experience is showing that behavioural interventions do have limits and entail uncertainties. For instance, interventions may only lead to marginal or incremental improvements, and short-term benefits can mask a lack of effectiveness in the long run. ‘Nudging’ also raises various ethical questions (e.g. are individuals manipulated into making unwanted choices?) and choice settings need careful evaluation and thought before implementation. In addition, behavioural initiatives have focused primarily on the analysis of individual behaviour; but much more attention needs to be given to organisational behaviour. In all, the process of understanding the effectiveness of dedicated, consumption-based behavioural change, and non-price interventions has only just begun in Scandinavia.
These issues underscore the value of evidence-based evaluation studies to support the design, choice and implementation of policies. The failure to acknowledge behavioural and consumption-based issues in policymaking may generate a path dependency in which policies are confined to technology, production-based incentives or market failures. This myopic approach can overlook important cost-effective policy options. Although the results obtained so far tend to be highly context-dependent, the experience in Scandinavia stresses that rigorous policy assessments are needed to bridge the gap between policy and science.
As argued in a previous GGKP Insights blog, policymakers and behavioural scientists need to work much more closely together, as doing so will help to better understand and accelerate the transition towards a green energy economy.