The Salience of Future Climate Impacts and the Willingness to Pay for Climate Change Mitigation

Abstract:

 

Investing in climate change mitigation has substantial benefits, but those benefits unfold over many decades. Economic theory addresses the separation of costs and benefits across time by discounting future benefits according to an appropriate social discount rate. By comparing the upfront cost to a discounted stream of future benefits, we can determine the optimal level of investment. However, we see individuals using implicit discount rates far higher than expected when they make decisions with upfront costs and a flow of benefits over a long time horizon. The mismatch between what economic theory predicts and what we see in actual behavior leads to the question of whether the extended time horizon between the mitigation decision and the benefits of that decision may hinder optimal investment in climate change mitigation in ways that rational choice theory does not predict. The immediate costs of the decision loom large in the decision-maker's mind while the future benefits of the choice have a lower prominence. As a result, climate change mitigation decisions may be prone to a salience heuristic -- a cognitive shortcut that substitutes the salience of benefits with the value of benefits. In an online randomized control experiment, I test whether focusing attention on the future risks and challenges of climate change will increase the willingness to pay for climate change mitigation. I also measure whether these treatments shift the decision-maker's implicit discount rate. In an Essay treatment, participants write an essay on the risks and challenges of climate change. In a Letter treatment, participants write a message on the risks and challenges of climate change directed to a particular individual living in the year 2050. I find that compared to a control group, both writing tasks that focus attention on the future risks and challenges of climate change increase the willingness to donate to climate change mitigation efforts. I also find that the Letter treatment reduces the decision-maker's discount rate, but the finding is only marginally significant. These findings contribute to the understanding of how to bridge the psychological distance between choice and consequence for climate change mitigation. This study also has broader implications for how psychological distance and the salience heuristic may influence a wide range of decisions from personal health choices to retirement savings.

 

Last updated on 12/15/2017