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October 22nd, 2015

Carbon pricing might be the unlikely winner of the Volkswagen scandal


Estimated reading time: 5 minutes


October 22nd, 2015

Carbon pricing might be the unlikely winner of the Volkswagen scandal


Estimated reading time: 5 minutes


Carattini-StefanoThe Volkswagen emissions scandal has led many to question the ability of environmental regulators to enforce standards. Here, Stefano Carattini and Alessandro Tavoni argue that this might be an opportunity to promote carbon pricing, as it does not require specific controls and is a cost-effective mechanism by which to reduce emissions.

The Volkswagen scandal has shaken our society in two ways. First, individuals and consumers lost trust in the company and in the automobile industry more broadly. This distrust may even spread to social and environmental responsibility as a whole. In the last years, the car industry spent considerable effort to green its image, and VW lead the charge, especially in the U.S. where it hoped to carve a sizeable niche for its ‘clean diesel’ brand; all this while cheating on environmental standards.

Second, individuals lost trust in the ability of regulators to oversee and enforce environmental standards. This might be bad news for the prospects of environmental regulation. It is, however, a great opportunity for environmental economists and policymakers to put forward the many arguments in favour of carbon pricing.

A tale of free riding

From a standard economic perspective, all situations involving common pool resources, such as clean air, are viewed as an opportunity for free riding, ineluctably leading to over-exploitation (in this context, too much pollution). While this has been true in many cases – for instance in competitive environments characterised by open access – other contexts can be more conducive to cooperation.

As the Nobel-laureate Elinor Ostrom suggested, cooperative outcomes can be sustained if stakeholders trust each other and trust is maintained through monitoring and sanctioning of free riders. She and colleagues surveyed many cases from the field and suggested that commons need not turn into tragedies. This body of work, however, focuses on local commons, and successful cases tend to be those where the actors know and can observe each other.

A tale of cooperation

Hence, cooperation can prevail, as far as local commons are concerned. But what about global problems such as the management of the climate commons? Well, again according to Elinor Ostrom, subjects may still be willing to cooperate if they expect others to reciprocate. Recent evidence suggests that individuals tend to respond to local norms, even in the context of a global dilemma. Relatedly, peer effects are found in the adoption of solar photovoltaic and of hybrid cars.

Social comparison can be an effective driver for spurring the private provision of a public good, in different situations. In the contect of climate change, trust appears to be negatively correlated with greenhouse gas emissions. Hence, some cooperation is observed in the climate commons. This is welcome news for climate policy, which may explain the observed emergence of bottom-up initiatives to tackle climate change, as well as the phenomenon of policy contagion in the adoption of climate laws. These initiatives have taken place while top-down international negotiations struggle to reach an ambitious and inclusive agreement.

Both  top-down and bottom-up approaches are being pursued in the lead-up to the upcoming Conference of Parties, which will take place later this year in Paris. Indeed, the current system of pledges that countries are to submit before the Paris Conference, known as Intended Nationally Determined Contributions, seem to mirror the phenomenon of policy contagion that has taken place in the last decade. More committed countries took the lead by pledging first and relatively high in the hope that others would follow. Even though the Paris agreement is unlikely to represent a major break-through, the hope is that the initial pledges will be strengthened over time. As Nordhaus puts it, “treaties do not spring full grown”, but require much cooperation and collective action beforehand.

Happy end?

Not quite a happy end yet. It is increasingly evident that we are running out of time. Emissions are still rising and the current pledges are not sufficient to curb emissions enough to prevent serious interferences with the climate system.  Pledges are not policies, and unlike commitments made under self-enforcing global agreements, they may lack credibility (or ambition) and trigger further free riding by second-movers. It will be hard for policy-makers around the world to translate the Intended Nationally Determined Contributions into policies, especially into first-best ones like a global price on carbon.

Carbon pricing is the preferred policy for economists concerned with efficiency, but is not popular with industries affected by stringent policies. Energy-intensive industries tend to lobby for softer policies, though the combined presence of national interests and increased lobbying pressure – from both business groups and environmentalists  – may create much more scope for unilateral action than previously thought.

Voters also tend not to like instruments such as carbon taxes (and environmental taxes in general), but for different reasons. A recent strand of research suggests that even if voters share the objectives of climate policy, there are obstacles to the implementation of carbon taxes. These mainly have to do with their potential distributional effects – which in principle can be compensated with lump-sum redistribution – and the perceived ineffectiveness of carbon taxes, in spite of their empirical effectiveness.

In brief some do not believe that taxes really change behaviour. Sceptics expect the government – which is seen as driven by the goal of appropriating new revenue – to earmark environmental tax revenue to be used for environmental purposes. How could we have any environmental effect otherwise? These factors contribute to explain the unpopularity that environmental tax reforms faced in many European countries: their aim was to be revenue neutral, but revenue neutrality (taxing here and reducing taxes elsewhere) was a criterion that the taxpayers probably did not request, nor understood.

For these reasons, the Volkswagen scandal – in conjunction with the upcoming Conference of Parties in Paris – might be an exceptional opportunity to strengthen many countries’ environmental and climate policy by introducing cost-effective policies such as carbon pricing.

According to the World Bank, domestic carbon pricing instruments now cover an increasing share of greenhouse gas emissions. The main argument in its favour is that carbon pricing does not require specific controls to be implemented. Such argument will resonate more with politicians now that the shortcomings of other environmental policies have been exposed. Millions of people around the world have been directly affected by the VW scandal, and even those who do not own a car equipped with the cheating software are affected by the emissions’ external effect. The sentiment of outrage is widespread and the behavioural implications are far reaching. It may well be that, besides hybrid cars, carbon pricing emerges as the unlikely winner from the diesel scandal on the bumpy road to Paris.


Note:  This article gives the views of the authors, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Authors

 Carattini-StefanoStefano Carattini is a Visiting Fellow at the Grantham Research Institute on Climate Change and the Environment, LSE



Alessandro_TavoniAlessandro Tavoni is Assistant Professorial Research Fellow at the Grantham Research Institute on Climate Change and the Environment, LSE




(Featured image credit: Mariordo CC BY-SA 3.0)

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This work by British Politics and Policy at LSE is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported.