Cost Perceptions and Household Responses to Carbon Pricing

In 2021 a carbon pricing scheme for the building and transport sectors was implemented in Germany with fixed prices. With the planned integration of the national emissions trading system into the European Union Emissions Trading System (EU ETS-II) by 2028, carbon prices are expected to rise substantially due to the transition to market-based pricing and a continuously decreasing cap on emission allowances. These anticipated price hikes will increase the financial burden on private households to encourage the adoption of low-carbon technologies. To this point, the diffusion of low-carbon technologies remains limited among private households in Germany. Previous research suggests that individuals are unable to form accurate estimates about the cost implications of price hikes for their household. In this project, we investigate whether the slow adoption of low-carbon technologies in Germany can be explained by misperceptions about the personal cost implications of higher carbon prices. Specifically, we ask whether an underestimation of personal costs at higher carbon prices might cause an underinvestment in low-carbon technologies and limit behavioral responses.

We conduct a tailored information provision experiment to test for the causal effect of individual cost perceptions at higher carbon prices on individuals’ intention to take measures to reduce their household’s carbon costs in the building and transport sectors. The experiment proceeds as follows: We start by asking respondents about their perceived additional costs of carbon pricing at a higher projected price, based on their current energy consumption, and their uncertainty regarding this estimation. To generate exogenous variation in beliefs, we provide random subsamples of respondents with personalized information about their actual costs of carbon pricing at the higher price, which we calculate based on previously reported household characteristics, including detailed information on their energy use. Afterwards, we elicit all respondents’ intention to take measures to reduce the carbon costs of their household. In total, we conduct four separate experiments: one for the building sector and one for the transport sector at a carbon price of 100 euros per ton of CO2, and one for each sector at a carbon price of 200 euros per ton of CO2.

Our experimental design enables us to identify the causal effect of individual cost perceptions on the uptake of measures to reduce carbon costs and investments in low-carbon technologies at the household level. Moreover, the design allows us to examine how respondents differentially incorporate quantitative information depending on their initial misperceptions and the degree of uncertainty surrounding their beliefs.