Prices and perceptions

Environmental economics often focuses on ‘getting prices right’. Yet, in reality, carbon prices remain underutilized or set at insufficiently ambitious levels. To inform the design of effective climate policy in line with climate targets, this dissertation explores three obstacles to policy implementation: public support, the presence of additional uncorrected market failures, and fairness concerns. This dissertation builds on two main tenets: First, a better understanding of the perceptions surrounding carbon pricing, and their role for appraisal, is crucial for disentangling epistemic disagreement about the effects of policies, and normative disagreement about their objectives. Second, the presence of uncorrected market failures complicates both the efficiency and fairness of designing environmental pricing in consumer-facing sectors. The research in this thesis blends empirical methods, specifically multi-country representative surveys and microsimulations based on household budget data, with public economic theory and philosophy of economics. The results contribute to a better theoretical and practical understanding on what drives public appraisal of climate policies. Specifically, this dissertation contributes novel insights across three research streams. First, my research contributes to the understanding of public support for carbon pricing by examining two under-explored cases: emissions trading and the extension of carbon pricing to heating and transport fuels in the European Union. My findings suggest that the emissions trading design camouflages the regulatory toughness commonly associated with carbon taxation, and reduces opposition. Moreover, complementary climate-friendly investments are crucial for ensuring sufficient public support for carbon pricing in the heating and transport sectors. Second, my research advances the understanding of how additional uncorrected market failures and behavioural effects complicate environmental pricing. Taxes on animal-based products and carbon pricing on heating and transport fuels can be designed to simultaneously correct other food-related externalities and address uncorrected market failures in the uptake of climate-friendly heating technologies and transport modes. Third, my research yields novel empirical and normative insights regarding the fairness of environmental pricing. While direct revenue recycling can offset the regressive impacts of meat taxation, carbon pricing in heating and transport may require a refined fairness criterion that is sensitive to the fact that the long-run capacity to switch to climate-friendly substitutes is sometimes constrained by factors beyond people’s control. The findings help distinguish when policymakers are best advised to focus on improving public understanding and when they should consider re-evaluating substantive policy design. They also yield nuanced policy implications for optimal, feasible and fair environmental policy design in consumer-facing sectors.