Three researchers provide willingness-to-pay estimates for specific climate policies in the United States—and the results show that the benefits are comparable with the costs of actual legislative proposals in the U.S. Congress.
Among the policy instruments to regulate greenhouse-gas (GHG) emissions in the United States, three have received the greatest attention and are likely to provide the basis for future debate: a cap-and-trade system of emissions permits, a carbon tax on GHG emissions, and regulation of carbon dioxide as an atmospheric pollutant under the Clean Air Act. While political discussion tends to focus on the costs of these measures to American households, missing from the debate is evidence on the economic benefits of achieving emissions reductions and on public preferences among policy instruments.
In general, the economic benefits of an environmental policy are measured as the public’s willingness to pay (WTP) to obtain a specified improvement in environmental quality. With the aim of estimating these benefits, we conducted surveys with questions designed to measure the WTP of households to reduce GHG emissions 17 percent by 2020. Our analysis is based on two surveys, one from 2010 and the other from 2011, with a combined sample size of 2,034 Americans aged 18 and older. The estimates of WTP are based on the stated preferences of respondents through a standard contingent valuation question. Other researchers, including some at Resources for the Future, have conducted similar surveys across nations and estimate WTP in support of emissions reductions (Carlsson et al. 2010). One difference in our work is that we anchor the WTP to the specific target outlined in actual legislative proposals in the U.S. Congress.
Beyond asking about WTP for emissions reductions, we included randomized treatments within the contingent valuation question to investigate how the choice of policy instrument—cap-and-trade, carbon tax, or GHG regulation—affects WTP. Although the costs associated with different policy instruments may differ, economic theory implies that the benefits of meeting an emissions target should be invariant to instrument choice. Whether such invariance holds is, however, an important question of political economy.
We asked questions about whether or not respondents think global warming is happening, and if they said yes, we also asked how sure they were about their opinion. In both surveys, more than 60 percent of the respondents think that global warming is occurring, and more than 54 percent of these respondents are “very sure” or “extremely sure” about their opinion. These results are broadly consistent with the findings of other studies that ask similar questions.
The contingent valuation question was worded as follows: “Congress is considering a [policy] that would reduce U.S. greenhouse gas emissions 17 percent by 2020. This policy would increase the cost of living for all American households. In support of this policy, what is the maximum amount your household would be willing to pay each year for the next 10 years?” Respondents could then select $0, $26, $60, $121, $157, $193, $250, $475 or more, or “Don’t know.” A key feature of this question was that we randomized whether each respondent received a question where the policy in brackets read as a “cap-and-trade policy,” “carbon tax policy,” or “policy to regulate carbon dioxide as a pollutant.”
the Importance of beliefs
Based on models that seek to explain the WTP responses, we find that the explanatory power of sociodemographic variables differs across the policy treatments. While gender is never important, education, age, and income have significant effects. Higher educational attainment is associated with greater WTP for all three policy instruments. Older individuals have a lower WTP for a carbon tax and GHG regulation than for cap-and-trade. A $10,000 increase in annual household income increases annual WTP by roughly $6 for a carbon tax and $2 for a GHG regulation, while having no significant effect for cap-and-trade. Household size tends to decrease WTP, especially for a carbon tax.
Political party affiliation at first appears to be the most important determinant of WTP. Republicans and “No party” respondents, who differ from Independents, have a significantly lower WTP for emissions reductions, regardless of the policy instrument. Republicans, compared to Democrats, for example, are willing to pay $37 less for cap-and-trade, $55 less for a carbon tax, and $54 less for a GHG regulation.
But most of the differences due to political affiliation no longer hold after we control for whether respondents think that global warming is happening. Respondents who are very sure that global warming is happening have a significantly higher WTP—a difference of more than $54—than those who are less certain about climate change. However, one of the three policies is an exception: even after accounting for beliefs about climate change, when it comes to support for a carbon tax, Republicans continue to have a significantly lower WTP.
Benefits and Costs
We find that American households have an average annual WTP of $79 for cap-and-trade, $85 for a carbon tax, and $89 for a GHG regulation, all of which are in support a 17-percent reduction in domestic emissions by 2020. These estimates contradict the frequently made argument that the costs of climate change policies are grossly disproportionate to the benefits.
Our estimates of mean WTP appear to exceed the lower-bound costs of actually meeting a 17-percent target through recent bills in the U.S. House and Senate. The U.S. Environmental Protection Agency estimates that provisions in the Waxman-Markey House bill would cost households $74 per household per year, and the Boxer-Kerry Senate bill would cost $79. But while both of these legislative proposals set a 17-percent reduction target by 2020, they go further to specify an 80-percent reduction by 2050. So, for purposes of comparison, our mean WTP should be considered an underestimate of the benefits compared against the full cost of achieving the 80-percent reduction specified in these leading congressional bills.
While we recognize that contingent valuation estimates of WTP are sometimes questioned because they are hypothetical, it is important to recognize that stated-preference surveys are the only way to estimate total economic value that includes both use and nonuse values, which includes considerations for future generations. Total economic value is thus important when considering the benefits of avoiding climate change impacts. We want to emphasize, however, that even if one is skeptical about the magnitude of the WTP estimates, our findings about differences in public support among policy instruments should still be of interest because the randomized design of policy treatments makes methodological biases constant across treatments.
We hope that policymakers will benefit from taking into account the insights of our analysis. Political support for cap-and-trade has lately diminished, supporters of a carbon tax are becoming more vocal, and the Obama administration is advocating regulation of carbon dioxide by the Environmental Protection Agency. Importantly, we find that policy instrument choice does not have a significant effect on mean WTP. But the sociodemographic characteristics of who is willing to pay, and how much, differs by instrument choice. Together, these results provide an economic justification for controlling domestic GHG emissions, and they illuminate the ways in which policy instrument choice is important to communicate because it can significantly affect public support.
Matthew J. Kotchen is an associate professor of environmental economics and policy at Yale University and a research fellow at the National Bureau of Economic Research; Kevin Boyle is a professor of environmental economics at Virginia Tech; Anthony Leiserowitz is Director of the Yale Project on Climate Change Communication.
Kotchen, M. J., K. J. Boyle, and A. A. Leiserowitz. 2011. Policy-Instrument Choice and Benefit Estimates for Climate-Change Policy in the United States. NBER Working Paper 17539.
Carlsson, F., M. Kataria, A. J. Krupnick, E. Lampi, Å. Lofgren, P. Qin, S. Chung, and T. Sterner. 2010. Paying for Mitigation: A Multiple Country Study. RFF Discussion Paper 10-33. Washington, DC: Resources for the Future.