Pigou ponders his preferences: decarbonisation options when habits are endogenous
Avoiding uncontrollable climate change implies that global greenhouse gas emissions must be reduced to net zero by the middle of the century. Environmental economics analyses how policy instruments that adjust relative prices can achieve this goal, while pursuing social change through inducing low-carbon preferences is usually not considered. We argue that climate policy will be more efficient if it takes account of policy-induced changes to consumers' objectives, in particular their habits and how they are learned. This is particularly relevant to policies concerning heterogeneous goods such as mobility and food. We show that the conventional Pigouvian approach to evaluating climate policy is insufficient if habits are endogenous because a single policy instrument can both affect prices and preferences. We re-examine the conventional instruments from this point of view. In particular, infrastructure choices can shape the social context that influences habits. Policymakers could thus consider more than just changes to relative prices to deliver on climate targets.