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How to Increase Public Support for Carbon Pricing with Revenue Recycling?

13.01.2025

The research article by Andrej Woerner, Taisuke Imai, Davide Pace, and Klaus Schmidt is now published in Nature Sustainability! We asked Davide Pace to share their key insights.

The research article by Andrej Woerner, Taisuke Imai, Davide Pace, and Klaus Schmidt is now published in Nature Sustainability!

We asked economist Davide Pace to share their key insights.

Discover how revenue recycling mechanisms, like the Climate Premium, can increase public support for carbon pricing.

Climate change is one of the most pressing challenges of our time, with its impacts felt across every corner of the globe. At the recent United Nations Climate Change Conference held in Baku in November 2024, world leaders came together to discuss critical measures for addressing this crisis. These discussions focused on ambitious goals, such as limiting global temperature rise to 1.5 degrees Celsius and achieving net-zero emissions by 2050.[1] With this in mind, could you share how carbon pricing fits into this broader global effort to combat climate change?

Davide Pace: Carbon pricing is one of the tools in the fight against climate change. It involves assigning a cost to carbon emissions, such as those from burning coal, oil, or gas. This cost is typically imposed as a tax or fee, incentivizing individuals and businesses to shift toward cleaner energy sources and reduce their carbon footprint. By making polluters pay for their emissions, carbon pricing aligns economic activities with environmental goals.

In the title of your research article, you use the term Revenue Recycling. What do you mean by revenue recycling mechanisms, and why are they important?

Revenue recycling refers to how the funds collected from carbon pricing are used. This can take various forms, such as reducing other taxes, redistributing the money directly to citizens, or funding climate mitigation projects. The way these revenues are allocated plays a crucial role in public acceptance of carbon pricing schemes.

So, in your study, you examine how different ways of using the money from carbon pricing can affect public support?

Indeed. We found that the most popular option among participants was a system called uniform carbon dividends, where everyone receives an equal share of the revenue. One specific variation, the Climate Premium, garnered the highest level of support. This approach was significantly more popular than allocating revenues to climate projects or providing targeted support for lower-income households. Instead, using the carbon revenues to bolster the government’s general budget was the least favored option.

What is a Climate Premium?

The Climate Premium is a form of carbon dividend where everyone receives a fixed, upfront, equal payment that reflects the expected revenue from carbon pricing. What sets it apart is that the amount is clearly defined and announced before the carbon price is implemented. This transparency builds trust and ensures that people understand they are compensated for the increased costs associated with carbon pricing.

That makes sense. Could you share some key findings from your study?

Sure. In a representative sample of the German population, only 47% of participants supported carbon pricing when the revenue was allocated to the government’s general budget. However, support for the Climate Premium soared to 73%, and redistributing revenues equally received 69% approval. These findings highlight that transparent and equitable revenue recycling mechanisms significantly boost public support for carbon pricing.

What is the main novelty your paper brings to the table?

Our study introduces a novel research approach that goes beyond hypothetical surveys. We conducted an experiment where participants’ decisions directly impacted their earnings and real CO2 emissions. At the same time, the experiment is simple enough that we could run it with a representative sample of the German population. This novel methodology can explain why we find that uniform carbon dividends maximize public acceptance, while previous work based on hypothetical surveys finds that public acceptance is maximized by using the carbon revenues for green projects or to help the poor. If people must put their money where their mouth is, they find it more appealing to support schemes that put money in their pockets!

How did you design this experiment?

Participants could purchase up to two virtual products. The first worth €7 and the second €5. Each purchase caused 60 kg of CO2 emissions. In one scenario, without a carbon price, the products were inexpensive, costing €3 each. In another scenario, a carbon price of €50 per ton of CO2 raised the product cost to €6, reducing participants’ earnings. The payment received by each participant at the end of the experiment and the amount of CO2 emissions depended on which of the two scenarios was implemented and on the number of products they bought in that scenario.

Participants could cast a vote to choose which of the two scenarios to implement. In five conditions we changed how the revenues from the carbon pricing scenario were used in the second. In one condition the revenues went to the general budget of the German federal government; in another they were used for green projects; in the last three the revenues were distributed equally, transferred to the poorer participants, or used to finance the Climate Premium.

To ensure the environmental impact was credible, we purchased CO2 offsets from Carbonfund.org for the products participants chose not to buy, demonstrating a tangible connection between participants’ actions and emissions.

Can you explain how the voting works in this setup?

We informed participants that they were part of a group of 50 individuals drawn from a representative sample of the German population and that the vote of one randomly selected group member would determine which of the two scenarios would be implemented for the entire group. This procedure, known as the “random dictator” in the experimental economics literature, ensures that each participant has an equal probability of deciding the outcome of the vote for the entire group, including themselves. Under this procedure, participants have an incentive to vote according to their true preferences.

Did you also explore participants’ perceptions of others’ behavior?

Yes, we asked participants about their beliefs regarding the purchasing and voting behavior of other group members. Interestingly, people consistently underestimated the level of support for carbon pricing among their peers, regardless of the revenue recycling scheme. Similarly, academic economists we surveyed underestimated public support, predicting just 45.4% approval compared to the actual 62.9%. This misperception might explain why economists struggle to convince policymakers to implement carbon pricing.

What do your findings mean for policymakers?

We find that well-designed carbon-pricing schemes achieve broad support in the population. We find majority support for carbon pricing with uniform carbon dividends in every demographic group, including conservatives and people who say they are not concerned about climate change. This result echoes the majority support for well-designed carbon pricing schemes in other recent studies worldwide. The message is clear: if politicians want to please their electorate, the time has come to implement carbon pricing.


[1]About COP 29 | UNFCCC

Read the article:

Andrej Woerner, Taisuke Imai, Davide D. Pace, Klaus Schmidt : How to Increase Public Support of Carbon Pricing with Revenue Recycling In: Nature Sustainability 2024

Read as well:

Klaus Schmidt: Support for carbon pricing higher than expected - LMU Munich, München