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The unpopularity of incentive-based instruments: what improves the cost–benefit ratio?

Abstract

Whereas ecological economists argue strongly in favor of incentive-based approaches to promote renewable energy sources and reduce energy consumption, those instruments have been shown to be particularly difficult to implement politically. We begin with a recognition that cost perceptions that inherently characterize incentive-based policy instruments are a fundamental reason for their unpopularity. We therefore argue that the crucial question that policymakers need to address is how the benefit–cost ratios of incentive-based instruments can be altered in ways such that their inherent costs become acceptable. By focusing on the various features of these instruments, we propose three strategies for answering this question theoretically: objectively reduce the costs, reduce the visibility of the costs, and identify compensation strategies, i.e., strengthen the benefit side of the equation. Based on a conjoint analysis for Switzerland, our results demonstrate that reducing objective and perceived costs may indeed strengthen support for incentive-based policy instruments, whereas cost compensation does not seem to work as well. We show, moreover, that the latter can be explained by the fact that substantial numbers of voters do not understand or are not convinced by the commonly proposed mechanism of environmental taxes. Given that voters do not believe in the usefulness and efficacy of incentive-based policy measures, no cost compensation is feasible.

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Notes

  1. 1.

    In a similar vein, also some (usually large) firms in the energy industry prefer command and control regulations to taxes because the former can be influenced to gain competitive advantages over their smaller rivals.

  2. 2.

    However, empirically, the superiority of incentive-based instruments is less clear. For example, it has been shown that the effectiveness of incentive-based instruments may be limited regarding large-scale innovations (e.g., Kemp and Pontoglio 2011) and, more generally, because of a rather inelastic demand for energy in the short-run (OECD 2006, p. 50).

  3. 3.

    For example, see “Are the Legacy Costs of Germany’s Solar Feed-In Tariff Fixable?” http://www.greentechmedia.com/articles/read/germany-moves-to-reform-its-renewable-energy-law (retrieved on August 4, 2016) or “Ineffizient und zu teuer” http://www.nzz.ch/mei-nung/kommentare/ineffizient-und-zu-teuer-1.18657976 (retrieved on August 4, 2016).

  4. 4.

    The survey was conducted in German, French, and Italian, the three most frequently spoken of Switzerland’s four national languages. Participants filled out the survey 65.4% in German, 26.0% in French, and 8.6% in Italian. Romansh individuals likely used the German version to respond to the survey.

  5. 5.

    The data collection process was conducted by the LINK Institute in Lucerne. The sample was provided by the Federal Office of Statistics from the “Stichprobenrahmen für Personen- und Haushaltserhebungen” (SRPH).

  6. 6.

    Although the question format differs from a ballot context in which citizens must cast either a yes or no vote, similar rating questions typically are used in pre-poll surveys in Switzerland. It seems to be a suitable way of reducing the number of “don’t know” answers in a situation in which citizens may not (yet) be totally sure about whether to approve or reject a proposal. To test the robustness of our results, we also estimated the model using a binary coding specification, i.e., individuals who indicated a high probability of voting yes (values of 8 or more out of 10) were assigned a 1 (“support”), whereas all others were coded as 0 (“not support”). The results can be found in Fig. 8 in the Appendix, and are almost identical to those presented in the main part of this paper.

  7. 7.

    Further analysis not presented here, moreover, revealed that indifference between policy measures persists if the policy measures are interacted with the source of funding.

  8. 8.

    http://www.defacto.expert/2017/07/18/das-ja-zum-energiegesetz-breite-zustimmung-zur-energiestrategie-oder-hart-erarbeiteter-erfolg/ (retrieved: November 22, 2017).

  9. 9.

    However, exceptions, such as increases in property values, are possible (see Deacon and Shapiro 1975).

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Acknowledgements

This research was conducted within the National Research Programme “Managing Energy Consumption” (NRP 71) funded by the Swiss National Science Foundation and supported by the IMG Foundation. We thank Philippe Thalmann and the anonymous reviewers for helpful comments on earlier versions of this article, and Wayne Egers for linguistic assistance.

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Correspondence to Isabelle Stadelmann-Steffen.

Appendix

Appendix

See Tables 1, 2, 3, 4 and 5 and Figs. 7 and 8.

Table 1 Attribute list and levels used in the conjoint analysis
Table 2 Data and descriptive statistics
Table 3 Citizens understanding of environmental taxes and modes of revenue recycling—the five items
Table 4 Full results of model 1
Table 5 Full results of model 1—depending on ideological predispositions
Fig. 7
figure7

What citizens of different political predispositions think about the elements of environmental taxes and modes of revenue recycling. Note: Share of respondents per category in  %. Source: Own data collected in the context of the vote on the popular initiative “Green economy,” September 2016. Representative national sample, N = 912. The precise formulation of the items can be found in Table 3 in the “Appendix

Fig. 8
figure8

Policy attributes and the probability that a proposal is chosen. Dependent variable: support as a dummy, coded ‘1’ for values higher than or equal 8, and ‘0’ for lower values. Note: Average Marginal Component Effect (mean and 95% confidence interval). Full results can be found in the supplemental material

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Stadelmann-Steffen, I., Dermont, C. The unpopularity of incentive-based instruments: what improves the cost–benefit ratio?. Public Choice 175, 37–62 (2018). https://doi.org/10.1007/s11127-018-0513-9

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Keywords

  • Incentive-based instruments
  • Energy policy
  • Public support
  • Multifactorial survey