Modelling the effectiveness of climate policies: How important is loss aversion by consumers?

Florian Knobloch,Mark A.J Huijbregts,Jean-Francois Mercure

doi:10.1016/j.rser.2019.109419

Florian Knobloch, Mark A.J Huijbregts + Show 1 more

Open Access

https://doi.org/10.1016/j.rser.2019.109419

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Abstract

Abstracts Reliable decarbonisation policies can only be developed with a thorough understanding of how consumers choose between energy technologies. Current energy models assume optimal consumer decisions which may result in expectations of the effectiveness of climate policies that are far too optimistic. Prospect Theory, on the other hand, aims to model real-life choices, based on empirical observations that losses have a relatively larger influence on decisions than gains, relative to a reference point. Here, we show for the first time how loss aversion can be included into a global energy model with high spatial resolution, using heating technology uptake as a case study. We simulate the future heating technology diffusion for 59 world regions covering the globe, with and without the consideration of loss aversion. We find that ignoring the implications of loss aversion overestimates the market uptake of renewables, in individual countries as well as on the global level. As a consequence, loss aversion results in higher projected CO2 emissions by households, and the need for much stronger policy instruments for achieving decarbonisation targets. In the case of residential heating, a carbon tax of 200 €/tCO2 is projected to reduce overall emission levels to a similar extent than a carbon tax of 100 €/tCO2 without the consideration of loss aversion. Even for similar degrees of decarbonisation, accounting for loss aversion implies substantial changes in the underlying technology composition: technology choices become subject to a ‘conservative shift’ towards low-carbon technologies which are relatively less efficient, but already more established in local markets.

Highlights

The Paris Agreement aims at limiting global warming to well below 2 C, which requires a rapid decarbonisation of the energy system worldwide [1]
They describe how the technology composition of the energy system might change over time, and project the resulting influence on energy use and greenhouse gas (GHG) emissions
We show that loss aversion has important implications for policy-making in individual countries, as market-based decarbonisation policies may need to become much more stringent to overcome the loss aversion effect

Summary

Introduction

The Paris Agreement aims at limiting global warming to well below 2 C, which requires a rapid decarbonisation of the energy system worldwide [1]. Decarbonisation scenarios and policies aimed at the uptake of low-carbon technologies are usually analysed by means of energy models, either on their own or as part of larger ensembles (e.g., integrated assessment models) [2]. Large-scale energy models are typically based on optimisation al gorithms, which aim at identifying feasible pathways at the lowest overall system cost (given the specified constraints, such as a carbon budget) [3]. Underlying such algorithms are the assumptions of rational decision-making, in form of cost minimisation or utility maximisation, at the whole system level [4]. Technological change depends on the uncoordinated decisions of millions of people, who act according to their different individual needs and perceptions, and different types of biases compared to the normative frame [5]

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