Seminar Room B
Demand-side policies are needed to reduce greenhouse gas (GHG) emissions. On top of traditional market-based instruments such as carbon pricing, policies promoting low- carbon lifestyles receive increasing attention in the literature. Understanding the interactions between those two can contribute to improved design of climate policies. To this end, we build a model of consumption decisions driven by a combination of intrinsic and social preferences, as well as prices of goods subject to carbon pricing. Agents form their social preferences under the in uence of peers in a social network. The carbon tax changes the consumption of carbon-intensive good through two e ects: the usual negative price-elasticity of demand and a change in preferences due to interactions in the social network. Endogenous preferences gives rise to a social multiplier of carbon pricing. We show that the social multiplier depends on four factors: (i) the strength of social in uence, (ii) the topology of the social network, (iii) the distribution of preferences before tax is introduced and (iy) the distribution of income. We nd a positive systemic social multiplier for a majority of parameter combination tested, implying that social interactions tend to magnify the demand-side e ect of a carbon tax.Our results demonstrate that the carbon price should be adjusted to take into account the process of formation of social preferences.