The role of economics in environmental protection

Temperature increase, the melting of polar ice-caps, the disappearance of animal species clearly stress the vital need for environmental protection. It has become an issue for economists in the mid-20th century. A variety of economic instruments have gradually been provided to public decision-makers, some of which being incorporated into public policies. As of now, thanks to breakthroughs in other disciplines, particularly in psychology, economists tend to recommend non-monetary incentives. But one may wonder to what extent they are effective…

One can identify four reasons for implementing an environmental policy: the cost of pollution caused by human activities; environmental protection being seen as a public goods game in which it is in one’s best interest to let others act and avoid contributing; beyond improving environmental quality, public measures, especially through taxes, are a source of income for the State; intergenerational solidarity: encouraging current generations to contribute for the benefit of future generations.

In the case of environmental policies, inciting consists in implementing a political measure whose goal is to change people’s behaviour. Acting proves necessary because most economic agents do not incorporate the environmental impact of their activities, i.e. externalities.   An externality is defined as a no-cost impact of an agent’s activity on others. Hence, the main goal of a motivating environmental policy will be to correct an externality by changing the behaviour involved. To do so, governments can use monetary incentives (taxes, subsidies, allowances) and non-monetary tools (nudges (simple, non-binding and low-cost actions), motivation, education).

  • Stenger A., Ouvrard B., 2018, Politiques environnementales et incitations. De la théorie à l’innovation empirique, Londres : ISTE Editions.

Monetary incentives

It was only in the 1920s that the British economist Arthur Cecil Pigou first proposed internalizing externalities, proposal known today as the Pigouvian tax or eco-tax.  By way of taxes or subsidies, the State must act to compensate the gap between private cost and social cost (collective cost). Governmental measures based on the Pigouvian tax are many: eco-contribution, domestic consumption tax on petroleum products (TIPP), bonus/malus system on purchasing a new vehicle (combining tax/subsidy).

Implementing this kind of tax requires to be fully informed about external costs and benefits, otherwise, there is a risk of budgetary imbalance: that was the case of the bonus/malus system implemented in France in 2008 and whose calculation had to be revised in 2018 following poor anticipation of the consumers’ response: the latter were far more numerous to take advantage of the offer, which led to increased costs for the State.

This Pigouvian pricing tradition for inciting (polluter pays principle) prevailed in public economics until the 1960s when it was questioned by another British economist, Ronald Coase (1960), who proposed that inciting should rest on the assignment of property rights on the externality. Coase assumed that agents, by bargaining for these rights, would achieve some optimal allocation equating one’s marginal cost with the other’s marginal benefit. The two best known applications of Coase’s theory are the SO2 (sulphur dioxide) allowance trading system in the United States implemented in 1990 and the European carbon emission trading system initiated in 2005.

The objective of regulating according to Pigou or Coase is to prompt people to adopt pro-environmental behaviours. But, fossil fuel pricing is not high enough to result in energy transition, which means that incentives are not strong enough. The emergence of environmental activist movements and the increase in environmental damage have considerably heightened the issue of incentives. This has led to a third kind of efficient and realistic control based on second-best solutions: it consists in minimizing the collective cost of decontamination for a given level of externality. This type of regulation has been implemented in the European Union since 1990 with car emission allowances for other pollutants than CO2.

The effectiveness and equity of these three previous types of incentives are variable depending on the context and, sometimes, « hybrid » incentives are required, such as the implementation of a CO2 allowance trading system combined with carbon price floor. However, consumers’ response to these measures has been poorly informed, as the studies carried out focused on rational individuals considering their own personal interest, which could not account for the effectiveness or failure of some measures: for example, the eco tax on electric and electronic goods has been operated smoothly whereas the heavy goods vehicles eco tax was massively rejected. New environmental forms of regulation and alternative incentives are taking into account behavioural biases and psychological factors.

  • Coase R. H., 1960. “The problem of social cost”, Journal of Law and Economics, n°3, 1-44.
  • Pigou A., 1920. The Economics of Welfare, London : MacMillan.

Non-monetary incentives

Since the years 2000, a new kind of regulation has emerged through nudges (Thaler, Sunstein, 2008). « A nudge is a simple, cheap action (to be implemented as well as avoided), and non-binding, whose goal is to influence individuals into making the best decisions to improve their well-being or, more generally, that of the whole society. The action may use psychological biases (particular framing of the different options, default option, etc.) or it may be information provided to individuals so as to trigger better awareness ».

Although nudges have been blamed, in terms of ethics, for being manipulative and paternalistic, they have become, thanks to easy implementation and low cost, a privileged instrument in environmental regulation.  A large number of daily measures thus rely on nudges, such as electronic document management or changing washing powder packaging. However, the agents’ response to their implementation is difficult to accurately predict as it mostly depends on psychological factors related to motivation or existing social norms.

Motivation is a fundamental element in analysing individual choices. Motivation theories can particularly explain – at least partly – the limitations of classical incentives. Many behaviours are actually prompted by psychosocial motivations (generosity, conformism, morale…) which prevail over purely monetary motivation and bias the usual cost/benefit calculation. This comes from the dual aspect of motivation (Deci, 1975): on the one hand, extrinsic motivation is related to monetary penalties in the context of individual decision-making; on the other, each individual has her/his own intrinsic motivation.

Whether it is one or the other aspect which prevails determines the effectiveness of environmental policies. The latter have first to identify an existing intrinsic motivation so as to be able to choose the most effective measures likely to alter people’s behaviours. It is the case, for instance, of waste prevention for which information and monetary mechanisms are used to influence people into adopting behaviours that are both beneficial to collective interest and their own.

  • Thaler, R. H., Sunstein C. R., 2003, « Libertarian Paternalism », American Economic Review 93 (2), 175-79.
  • Deci E. L., 1975, Intrinsic Motivation, New York : Plenum Press.

Are incentives effective?

Despite existing incentive instruments, adopting a pro-environmental behaviour does not come that easily or quickly. This is why, according to the UNESCO (2014), education definitely seems to be among the most effective courses of action to change people’s behaviours. Through equipping more and more learners with knowledge, education empowers them to adopt pro-environmental lifestyles and increasingly act as «green» contributors.

Education can also play the role of green intergenerational catalyst. By relying on the theoretical notions of commitment and social representations, the programmes of Education for Sustainable Development are being integrated within the educational system. These measures directly influence behaviours by changing beliefs and attitudes, but, as for motivations, the role of education is merely informative. Although, for the time being, these programmes are only allocated little funding and their role restricted to information, education has a direct, positive short-term impact on pupils’ behaviours and, over the long term, on the citizens they will become as well as some positive indirect impact on their parents’ behaviours (MGEN, 2015).

Last of all, regarding effectiveness, one has to consider the institution delivering the incentive as well as the relations between incentives, motivation and institution. Targeted individuals are actually quite responsive to the nature and familiarity of the institution implementing the measure. For it to be effective, it must, on the one hand, win the support of the agents involved and its expected results must be rather in line with those achieved; and on the other hand, the institution in charge must be accountable and must earn agents’ confidence.

  • MGEN, 2015. L’éducation à l’environnement et au changement climatique, regards croisés des enseignants et des parents, Rapport, Paris.
  • UNESCO, 2014. Feuille de route pour la mise en œuvre du programme d’action global pour l’éducation en vue du développement durable, Paris.

Crédits images en CC : Flaticon Freepik, Good Ware

Magali Jaoul-Grammare, Benjamin Ouvrard, Anne Stenger

Magali Jaoul-Grammare, CNRS, BETA-UMR 7522, Université de Strasbourg (, Benjamin Ouvrard, INRA, Toulouse School of Economics (, Anne Stenger INRA, BETA-UMR 7522, Université de Strasbourg ( )

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