The Demand for Climate Protection – An Empirical Assessment for Germany

During the last two decades, the issue of international cooperation in climate protection has received increasing attention in economic research. The main focus has been on the underlying economic incentives for sovereign states to reach international environmental agreements. Besides the fundamental incentive problems of international cooperation, climate change policy has an important political economy dimension. National climate protection targets have to be politically acceptable to the domestic constituency. Moreover, even without international and national climate policies, individuals reduce CO2 emissions and voluntarily contribute to the global public good climate protection via carbon offsets. An empirical evaluation of the demand for carbon offsets and the people’s willingness to pay (WTP) for climate protection is thus crucial for assessing the prospects of climate change mitigation. Essentially, two methods for measuring the WTP for a particular good are available: First, one can infer the WTP from observing some economic transactions, i.e. the so-called revealed preferences approach. Second, one can ask people what they are willing to spend on some amount of a particular good or what quantity they are willing to purchase at a given price. This method is known as the stated preferences approach. Against the background of climate mitigation policies, all studies in the past that tried to measure WTP are varieties of the stated preferences approach. Thus, so far the WTP for climate protection has been derived from hypothetical decision situations only. This study aims at eliciting the participants' real WTP for climate protection with the revealed preference approach. We conducted an experiment where people faced the opportunity to buy allowances from the European Emissions Trading Scheme (EU ETS). The sample consisted of 202 individuals from the residential population of Mannheim, Germany. Participants of the experiment received € 40 and obtained information about (i) climate change and its effects on environment and human society and (ii) the EU ETS. Five prices were shown to each participant. The participants then indicated which quantity of permits they would like to buy for each price. After the experiment, one of the five prices was randomly selected and transactions were conducted accordingly. This method was chosen to guarantee incentive-compatibility and to implement a decision situation which is familiar to consumers since they have to state their demand at a given price. Purchased allowances were withdrawn from the EU ETS. From the observed price-quantity-combinations we derived participants’ demand and the corresponding WTP. The experiment consisted of two treatments “Baseline” and "Reputation". In the latter, subjects knew in advance that they could obtain a certificate, verifying the purchased amounts. The main result is that WTP for carbon reduction is very low: It amounts to approximately € 12 per ton of CO2. Compared to the figures previously reported by stated preference studies on the WTP for climate protection this amount is fairly small. Moreover, the median WTP for our sample is zero. With respect to the treatment variable (certification of CO2 reduction), we find a positive reputation effect, i.e. the quantity climate protection demanded in the reputation treatment was significantly higher compared to the baseline treatment. The analysis of data on socio-economic variables as well as of attitudes towards global warming shows a negative age-effect and a positive effect of the formal educational level. An additional determinant of demand for climate protection is the preference for political parties: voters of the Green Party buy more permits.

Löschel, Andreas, Bodo Sturm and Carsten Vogt (2010), The Demand for Climate Protection – An Empirical Assessment for Germany, ZEW Discussion Paper No. 10-068, Mannheim.