This paper applies insights from behavioural economics literature to design options in climate policy to make suggestions on how to create and pass effective climate regulation. The paper makes three main suggestions.

First, when pricing carbon, the use of policy bundling helps to counter cognitive biases such as ‘loss aversion’. Second, financial incentives are required for clean tech and renewable energy sectors to become competitive with traditional energy markets. Third, climate policy needs to target the finance sector, particularly the banking industry, to encourage capital flow to these alternative energy markets.

In this way, effective climate policy may have a nudging effect on a spectrum of decision-makers, with the net benefit of facilitating climate change mitigation and timely transition to a low-carbon global economy.

To read the full article, follow the link to the SSRN website.