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B07: Policies for Sustainability

We analyze the effectiveness and efficiency of policy tools for sustainability, identify behavioral mechanisms, and integrate these findings into welfare analysis. On the supply side, we analyze the impact of policies through econometric ex-post evaluations. On the demand side, we implement field experiments providing behavior-specific real-time feedback. We employ structural estimation techniques to quantify welfare effects and to perform counterfactual policy simulations. We also lay the groundwork for the implementation of field experiments in firms and organizations.


Project members (B07)


Policy outreach (B07)


Publications (B07)


Discussion papers (B07)


Experiments (B07)



Climate change is caused mainly by emissions of carbon dioxide (CO2) that arise as a negative externality in the combustion of fossil fuels. Scarcities of natural resources, most importantly water, also present important challenges. The effectiveness of supply-side policies for sustainability is complicated by the presence of multiple market failures. Regulations must induce firms to internalize not only a negative environmental externality, but also a positive externality in research and development of low-carbon technologies. On the demand side, a fundamental problem for consumers is the lack of visibility of resource consumption generated by their behavior. This biases choices in favor of more resource consumption, and mutes consumers' responses to price incentives. 

Policy relevance

The European Union established a cap-and-trade system as its flagship policy instrument to combat climate change, on top of member states' policies using carbon taxes. A burgeoning literature explores the possibilities of providing aggregate feedback on resource use with private households to increase resource efficiency in the US. But while effective in the US, these interventions prove largely ineffective in Europe. Policy makers are constrained by a dearth of evidence on the effectiveness and welfare effects of current policies for sustainability targeted at both firms and households.

Project plan

Work package 1 - Pan-European evaluation of the EU ETS

  • We test whether participation in the EU ETS has reduced CO2 emissions of manufacturing firms and whether it has affected their international competitiveness.
  • Our analysis builds on longitudinal microdata obtained from administrative sources in various countries. The pan-European research design guarantees large samples, representative results, and allows us to explore rich heterogeneities.

Work package 2 - Habit formation in resource conservation

  • The aim of this work package is to estimate the extent of habit formation and to understand its underlying behavioral mechanisms.
  • We implement a field experiment in which individuals receive real-time feedback on their resource consumption. The treatments differ in the frequency and duration of the feedback.
  • This permits a detailed test of Stigler-Becker type models and models of automatic habit control from neuroscience and psychology.

Work package 3 - Sequential tournament incentives in resource conservation

  • We implement a resource efficiency challenge through a sequential elimination tournament.
  • The setup allows us to estimate feedback and incentive effects, and to estimate the welfare effects of the intervention.

Work package 4 - Structural estimation

  • This package revisits selected research questions from the preceding work packages which cannot be answered with reduced-form econometric techniques.
  • We evaluate pass-through of carbon costs based on the parameters of structurally estimated production functions.
  • We develop structural models of habit formation with forward-looking individuals.
  • We estimate tournament incentives within a dynamic model that accommodates strategic interaction between players.

Work package 5 - Piloting experiments in firms and households

  • An important part of the project is to initiate new research projects and extend the experimental methodology developed for households to firms and organizations.
  • This requires extensive pre-testing and piloting of potential interventions, in collaboration with the potential project partners and the policy sector.
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