The objective of COBHAM is to study behavior and interactions among individuals and their impact on energy efficiency and climate change mitigation. The project aims at increasing our understanding of human behavior in relation to the environment and in developing models able to incorporate the heterogeneity and the complex dynamics of individual decision making.
The project integrates different disciplines –behavioural economics, complex networks, big data analytics, integrated assessment modeling- with the objective to go beyond the standard analysis of energy and climate policies in the presence of environmental externalities, by accounting for the heterogeneity in consumers' preferences, the role of social interactions, and the presence of behavioral tendencies and biases.
Specifically (and hopefully!) the project will:
In doing so, the project will be able to provide a richer characterization of energy demand response, to evaluate the impact of behavioural ('nudges') and traditional interventions on emission reductions, and to provide input to the design of new policy instruments aimed at influencing energy and environmental sustainable behavior.
In order to generate robust estimates of the efficacy of these behavioral interventions, several formal methods will be used.
COBHAM is of high public policy relevance given Europe's legislation on energy efficiency and CO2 emissions, and its applicability to the broader context of ethical behaviour and consumption.
The fundamental motivation of this project originates from the belief – matured as an active member of the integrated assessment community and by my work in the IPCC assessment review – that current assessments of energy and climate policies lack the understanding and the characterization of one of the most important factors for effective and efficient policy design: consumer behavior.
By focusing on stylized representative agents, current generation models fail to capture the heterogeneity of consumer preferences and endowments, the complexity and often non-standard (in pure economic meaning) characteristic of agents utility functions, and the behavioral tendencies which affect many of our everyday choices.
The idea that conservation has the potential to create "win-win" environmental and economic opportunities has been long discussed in the literature. The strongest argument in favor of energy and emission conservation measures is that firms and especially consumers do not undertake privately profitable investments because of some kind of inefficiencies, leading to impose on themselves what psychologists refer to as internalities. This translates in consumers'undervaluation of energy and emission costs when making decisions which matter for consumption, a phenomenon which has puzzled researchers to the point that it has been dubbed as the Energy Paradox 4 7 8
The additional line of reasoning for proposing government intervention to correct decisions about consumption of fossil fuel energy or investments in energy innovation is that of externalities. When there are both externalities and behavioral heterogeneity and tendencies, the nature and form of public policy intervention to ensure an efficient outcome change, since these call for different kind of government action (e.g. pricing to address externalities, subsidies or mandates to affect behavior).
Most importantly, the two interact in such a way that makes it impossible to address them separately9 . If prices are set correctly, individuals might still engage in inefficient levels of economic activity because of imperfect information, or behavioral anomalies like present bias, bounded self-control etc. Considerable research is this needed to understand and model the interplay between standard environmental policy intervention and the characteristics and responsiveness of consumer behavior.
In order to assess these key questions innovative research is called that departs from the standard economic theory of instrument choice. This needs to bring together interdisciplinary theories and applications of behavioral public finance, experimental economics, environmental and ecological economics and technology policy. This project is designed to fill this gap by providing a novel research assessment of public policy design which accounts for externalities, internalities and heterogeneous preferences.
The overarching objective of COBHAM is to develop models and calibrate them to reality for designing climate and energy policies which work in the context of externalities and heterogeneous internalities. This will be achieved by linking several components which has so far not been addressed jointly.
First, I plan to take into account consumer preferences –including different energy capital endowments, other-regarding non-standard preferences, social interactions- and subsequently behavioral tendencies –impatience, inattention, status quo bias, etc. Second, I will link the consumer and behavioral components to the externalities. This project aims at filling this gap by integrating consumer heterogeneous preferences and behavioral traits into the traditional analysis of energy and climate policymaking in the presence of externalities. COBHAM sets forth to address three main research questions:
The project is built around 4 main building blocks, identified by intertwined work-streams, which map into the 3 main research objectives identified above.
In this work-stream I plan on developing novel theoretical models which can account for behavioral tendencies. A few promising research avenues have been recently proposed and will be explored further in this project. These include the idea of modeling "myopic" consumers which do not fully value "add-on costs" when purchasing a good or service 6 25, and which have heterogeneous internalities 26. Alternatively, behavioral anomalies can be modeled assuming that preferences are time inconsistent, both in the case of a representative agent and with heterogeneous agents 27 28 models which can account for several different psychologies at the same time have also been recently discussed 11. Starting from this new promising body of research, I plan to develop theoretical models which can explain apparently suboptimal energy choices of consumers when these are subject to behavioral biases. These models will allow formalizing the fundamental mechanisms which shape consumers' decisions in a stylized way and will provide intuition and input to WS2 and WS3 about which are the most relevant empirical and modeling questions to be estimated and simulated.
The literature indicates that there is a need for new empirical work, which takes advantage of randomized control trials and quasi-experimental design. In this work-stream I plan to improve the empirical understanding of the drivers of consumer behavior by using both available data and new data purposely generated with the usage of three different methods (survey, lab experiment and field experiment). Three techniques will be used since these are complementary, have different predictive power (e.g. about causality), are affected by different biases, and address distinct issues.
Integrated assessment models (IAM) are widely used tools. However, the current generation of models has focused on expanding the detail of energy supply but has rested on a series of very limiting assumptions on consumers' demand and response. In this work-stream, I plan to calibrate models to reality using real data and elicited preferences and consumer response (see WS2) making the most of the numerical modeling techniques which I have mastered as an integrated assessment modelers. The model WITCH 34, which I co-developed, is one of the few IAMs which features a non-cooperative game theoretic structure and policy induced technical change, and which allows to assess the optimal policy mix under multiple externalities 35 36 37. I plan to enhance it by modifyng the agents preferences and behavioral tendencies –for example by including time inconsistency via quasi-hyperbolic discounting, or by modifying the welfare function to account for more complex utility. The model will be first applied to generate a new set of Shared Socio-economic Pathways (SSPs) with a richer description of the consumer characteristics. It will be then be used to evaluate the optimal energy and climate policy mix under both externalities and internalities, focusing on the most relevant sectors for energy demand (e.g. transportation, buildings).
COBHAM is meant to advance our understanding of how consumers react to public policies and what are the implications for social welfare when it comes to the crucial questions of regulating the use of energy and of the associated carbon emissions. Given the enormous policy relevance of these questions for Europe, and the limited research in the field, this project could be instrumental in providing a research oriented, analytical assessment of the policy debate, and in informing the policy process itself with new proposals.
Particular attention will be devoted to the outreach and collaboration activities, through publications in the peer reviewed literature, and workshops and conferences. The project also aims at offering the maximum transparency, by providing open source access to all the material, database, methods and tools.