Project

What?

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:

  • understand and test the potential of behavioral interventions to promote energy efficiency, pro-environmental behaviour, and adoption of green technologies;
  • model energy demand response using the big data coming from smart meters and devices;
  • build a behaviorally founded integrated assessment model for the assessment of climate change and energy policies.

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.

  • Randomization methods such as Randomized Control Trials (RCT) and lab/web experiments will allow us to evaluate the causal relations between policy interventions and pro-environmental behaviour, by comparing proper treatment and control groups
  • Big data analytics using the large amount of data coming from the smart meters and online platforms will be used to carry out statistical analysis of energy demand response
  • Numerical modeling tools will allow us to assess the welfare impacts of climate and energy policies
  • 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.

    Why?

    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.

    Research objectives

    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:

    1. What is the impact of consumers' non–standard preferences and social interactions on energy and climate policy design? The extent to which energy policy mechanisms affect household consumption and expenditures is a matter of considerable uncertainty 14 15 16. Moreover, a burgeoning – and promising – literature, both theoretical and empirical, investigates on the role of social interactions for individual decision-making, therefore for consumption choice. For example, providing social norms information – such as via feedback to customers with a focus on peer comparisons– has been shown to induce people to conserve energy at a low cost, though not uniformly 18 19 20. COBHAM sets forth to quantify the impact of individual non-standard preferences and social interactions on the form of policy intervention meant to reduce energy consumption and CO2 emissions.
    2. What is the impact of behavioral tendencies and internalities on energy and climate policy design? There is now considerable empirical evidence that indicates that behavioral tendencies play an important role for energy consumption and emissions of greenhouse gases 21 22. Examples include present bias and time inconsistency, leading individuals to discount heavily fuel operating costs of an automobile; limited attention, for example to energy costs which become salient only when the energy bills is received; reference dependence, in the choice of the energy supplier, and many others. These behavioral anomalies suggest that individual often fail to take energy actions even if they appear to be in their private interest, justifying a paternalistic policy intervention to correct these inefficiencies. One of the key contributions of this project will be to incorporate behavioral tendencies and biases in the traditional analysis of energy and climate policies.
    3. What is the optimal climate and energy policy instrument mix when considering externalities together with non-standard preferences and internalities? Understanding the interaction of internalities and externalities is key to the design of the optimal policy instrument mix, and of the assessment of the currently proposed one in the policy arena. In the presence of both externalities and internalities, standard 'Pigouvian' taxation can not only improve social welfare but also private welfare. Moreover, the undervaluation of energy costs due to behavioral tendencies can be best addressed with subsidies rather than taxes, suggesting a rationale for the use of overlapping policies 24. Developing tools which allow to simultaneously assess policies aimed at correcting the two sources of inefficiencies is thus a research and policy priority. COBHAM is designed to address these issues by developing novel integrated models which can simultaneously account for externalities and behavioral characteristics.

    Approach and methodology

    The project is built around 4 main building blocks, identified by intertwined work-streams, which map into the 3 main research objectives identified above.

    WS1 Theoretical models.

    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.

    WS2 Empirical analysis and validation.

    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.

    1. Surveys Surveys are routinely conducted in many countries by government agencies and research institutions to assess the stock of energy-using devices, their capital and operating (i.e., energy) costs, their vintages, etc. Applied to the case of energy policy, belief elicitation through surveys can be used to assess the perception of energy consumption for household energy conservation activities and test the importance of cognitive skills 23; or to test systematic underestimation of fuel costs when purchasing a new or used vehicle 29. In some cases, existing surveys provide sufficient information. Certain countries, however, do not engage in systematic data collection efforts about energy-using equipment, beliefs and habits. I will thus begin with a throughout assessment of all the relevant surveys which have been carried out in Europe over the past several years. Once the data gaps have been identified, I will conduct a survey of the relevant economic agents about ownerships, characteristics, use and beliefs of specific energy goods and durables. This will allow understanding the extent to which different endowments and beliefs impact energy consumption and the purchase of energy efficient and low emissions goods.
    2. Controlled lab experiments Controlled experiments in the laboratory have become standard tools among economists to test a variety of theories. In climate change, there have been public good applications to test the importance of cooperation and communication 30 31 experiments is certainly useful in order to overcome the well-known identification problems arising in empirical studies 17, and to be able to test principles of causality. For this reason, I plan to carry out a controlled experiment as a way to understand the mechanisms of interactions across consumers when it comes to engaging in energy and environment-friendly behavior, e.g., purchasing and adopting new energy-efficient and low-carbon technologies.
    3. Randomized Field experiment Randomized field experiments are increasingly used in testing and refining behavioral interventions 32. Specialized companies are emerging –for example the firm OPOWER has realized several experiments at scale in the past few years, mostly in the US (and currently also in the UK). I plan to pair up with a company to carry out one field experiment in the area of energy consumption. Potential partners include specialized companies (e.g. OPOWER) or a large power utility with operations across Europe. The main objective of the field experiment is to estimate consumers' response to policy intervention in a natural and unbiased way. Experimental candidates include the provision of information to measure its impact on complex decision about energy choices (e.g. tariff schemes), the impact of financial rebates when purchasing efficient durables (e.g. CFL light bulbs), and the impact of on-bill financing of efficient equipment.

    WS3 Integrated Assessment Modeling

    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).

    Impact

    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.

    References

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