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

Stadelmann-Steffen, Isabelle; Dermont, Clau (2018). The unpopularity of incentive-based instruments: what improves the cost–benefit ratio? Public choice, 175(1-2), pp. 37-62. Springer 10.1007/s11127-018-0513-9

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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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