Mental accounting shapes public support for green spending of carbon tax revenues

Despite its potential for curbing greenhouse gas emissions, carbon taxation encounters strong public resistance in many countries. However, social acceptability of carbon taxation heavily depends on how the generated revenues are used. Citizens prefer carbon taxation schemes where tax revenues are earmarked for environmental protection rather than for non-environmental purposes (e.g., lowering the value-added tax or labour taxes). Here, we test the hypothesis that acceptability varies across earmarking domains according to a mental accounting heuristic, by which people create mental budgets where the origin of revenues is matched thematically with their domain of use. Across two experiments conducted in the United Kingdom and in France (Ntotal = 3500), we show that citizens display a specific preference for tax designs where the earmarking domain is matched with the revenue source (i.e. a carbon tax earmarked for environmental protection), relative to an unmatched tax scheme. Moreover, we find that acceptability of carbon taxation increases with the proportion of tax revenues earmarked for environmental protection.

Choice Simplification: A Theory of Mental Budgeting and Naive Diversification*

We develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste, consumption opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specific ways. If the agent’s problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may—consistent with naive diversification—choose a fixed, unconsidered mix of products. And if the agent’s problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need.