Willingness to Pay

INTRODUCTION

One might imagine that even if people believe that global warming is a threat that needs to be dealt with, they may hesitate when ameliorative actions will cost them economically.  And many observers have said that significant efforts to reduce greenhouse gas emissions will be extremely expensive. So it’s worth gauging people’s willingness to pay.  Such opinions are usefully considered in light of recent legislative attempts.

In recent decades, a variety of attempts have been made to pass legislation to reduce greenhouse gas emissions at the federal and state levels in the U.S. On June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act (ACES). But the bill did not advance to the U.S. Senate and therefore did not become law. Under the American Clean Energy and Security Act, domestic greenhouse gas emissions would be reduced primarily through a national cap and trade system. Key targets in ACES were a 17% reduction in greenhouse gas emissions (below 2005 levels) by 2020 and an 80% reduction by 2050.

On May 12, 2010, the American Power Act (APA) was introduced to the U.S. Senate as a draft bill. Under the APA, domestic greenhouse gas emissions would have been reduced primarily through a national cap and trade system. Key targets in the APA were a 17% reduction in greenhouse gas emissions by 2020 and an 83% reduction by 2050. The U.S. Senate did not vote on the APA, so it, too, did not become law.

Substantial economic costs of achieving the greenhouse gas emission reduction targets were often said to be the primary reason that the ACES and the APA failed to be passed by the Senate. The Congressional Budget Office (CBO) estimated that the ACES would cost the average American household $175 per year (in 2010 dollars) (CBO 2009). The Environmental Protection Agency (EPA) estimated that the ACES would cost the average American household between $74 and $117 per year (in 2010 dollars) (1), and that the APA would cost the average American household between $79 to $146 per year (in 2010 dollars) (2).

Are American households willing to bear the costs of reaching these greenhouse gas emission targets? We explored this issue between 2010 and 2015.

In three of our studies, Americans were willing to pay at least $13,340 million, $16,008 million, and $16,356 million (Studies 1, 2, and 3 in the figure below). Each of these amounts was greater than the lower bound of the cost incurred by the American Power Act ($12,760 million), as shown in the following figure. Americans were willing to foot the bill like the American Power Act. How these total amounts of Americans’ willingness to pay were produced is explained below.

willingnessgraph1

STUDY 1 – A NATIONAL SURVEY IN JANUARY 2015

Study 1, conducted in January 2015, gauged Americans’ willingness to pay for the cost of a national program to reduce greenhouse gas emissions by 85% by the year 2050. The cost of the program were described as being incurred by American households through higher market prices of goods and services. Each survey respondent was randomly assigned to be asked about one of three possible annual costs to them: $100, $150 or $190 during the first year of the program, and increasing slightly each year throughout the duration of the program.

Respondents were asked:

The U.S. Congress considered passing a law that would reduce the amount of greenhouse gases that the country puts out by 85% by the year 2050.

If this law would cause your household to pay an extra [randomly selected: $100, $150, $190] per year for the things you buy in 2015, and the cost would increase slightly each year until 2050, would you vote for this law or against it?

As expected, the percent of respondents who voted in favor of the program was highest, 47%, when the price was lowest ($100). The  who voted in favor at $150 and $190 were about the same: 40% and 42%, respectively (see the figure below).

Slide2The non-parametric Turnbull method was implemented to obtain a lower bound of estimate of average willingness to pay as follows.

  • 47% of respondents voted in favor of the program at a cost of $100. Because $100 was the lowest price we asked about, the Turnbull method assumes that everyone who voted against the program at this cost was willing to pay $0 (even though they might have revealed some willingness to pay if we had asked them about a price lower than $100).
  • Because 40% of respondents voted for the program at a cost of $150, the Turnbull method assumes that 7% of respondents (47% – 40%) were willing to pay $100 (even though maximum willingness to pay for some or all of these people might have been between $100 and $150).
  • Because 42% of respondents voted for the program at a cost of $190, the Turnbull method assumes that 0% of respondents (max (0, 40% – 42%)) were willing to pay $150.
  • Because $190 was the highest price we asked about, the Turnbull method assumes that the 42% of people who voted for the program at that price were willing to pay that price (even though they might have revealed a higher willingness to pay if we had asked them about a higher price).

The lower bound of average willingness to pay per household across all respondents was calculated to be $85.

This is below the cost range estimated by the EPA ($110 to $204 in 2015 dollars).  And since $85 is a lower bound estimate, true mean willingness to pay may have been higher.

STUDY 2 – A NATIONAL SURVEY IN 2013

Study 2 employed the same study design as Study 1, with one difference.  For about half of the respondents, selected randomly, the cost of the program to them in 2050 was stated explicitly, but this number was not stated for the other half of the respondents.

The latter half of the respondents were asked the following question that did not mention the cost in 2050:

The U.S. Congress considered passing a law that would reduce the amount of greenhouse gases that the country puts out by 85% by the year 2050.

If this law would cause your household to pay an extra [randomly selected: $100, $150, $190] per year for the things you buy in 2013, and the cost would increase slightly each year until 2050, would you vote for this law or against it?

49% of these respondents said they would vote in favor of the program when the price was $100, 56% said so when the price was $150, and 54% said so when the price was $190 (see the figure below).

Slide3The lower bound average willingness to pay per household across all respondents who did not hear the cost in 2015 was $108 (in 2013 dollars), or equivalently, $115 in 2015 dollars.

The other half of the respondents were asked the following question that mentioned the cost in 2050:

The U.S. Congress considered passing a law that would reduce the amount of greenhouse gases that the country puts out by 85% by the year 2050.

If this law would cause your household to pay an extra [randomly selected: $100, $150, $190] per year for the things you buy in 2013, and the cost would increase slightly each year up to about [$300, $450, $750] in 2050, would you vote for this law or against it?

46% of these respondents said they would vote for the program when the price was $100, 45% said so when the price was $150, and 32% saidso when the price was $190 (see the figure below).

Slide4The lower bound average willingness to pay per household across all respondents who did hear the cost in 2015 was $81 (in 2013 dollars), or equivalently, $87 in 2015 dollars.

STUDY 3 – A NATIONAL SURVEY IN 2010

In Study 3, each respondent was asked one or two follow-up questions about their willingness to pay at the next price (higher or lower) based on their answers to the question of the initial price.

A randomly selected third of the respondents were asked the series of questions that started with the lowest bid, $75.

If the U.S. Congress were thinking of passing a law that would reduce the amount of air pollution that the country puts out by 85% by the year 2050, and if that would cost your household an extra $75 in taxes every year on average, would you vote for this law or against it?”

59% of the respondents said they would vote for this law with an annual price of $75, and these respondents then voted on the program at $150. And respondents who voted in favor of $150 were subsequently how they would vote on the program at $250.

Another third of the respondents were asked the series of questions that started with the middle bid, $150:

If the U.S. Congress were thinking of passing a law that would reduce the amount of air pollution that the country puts out by 85% by the year 2050, and if that would cost your household an extra $150 in taxes every year on average, would you vote for this law or against it?”

58% of the respondents said they would vote for this law with an annual price of $150, and the respondents who voted for it at that price were then asked if they would vote for it at $250 . And the respondents who did not vote for the law at $150 were asked if they would vote for it as $75.

The last third of the respondents were asked the series of questions that started with the highest bid, $250:

If the U.S. Congress were thinking of passing a law that would reduce the amount of air pollution that the country puts out by 85% by the year 2050, and if that would cost your household an extra $250 in taxes every year on average, would you vote for this law or against it?”

50% of the respondents said they would vote for this law with an annual price tag of $250. Respondents who said they would not vote for this law with an annual cost of $250  were asked if they would vote for it at a cost of $150, and respondents who said they would not be willing to pay $150 for the legislation were asked if they would be willing to pay $75 for the same policy.

Putting all the data together, 59% voted for the law at a price of $75,  58% voted for it at a price of $150, and 50% voted for it at a price of $250 (see the figure below).

Slide5The lower bound average willingness to pay per household across all respondents, based on their responses to the first questions they were asked, was $163 in 2015 dollars.

Based on their responses to all questions, 66% of respondents voted for the policy when the price was $75, 53% voted for it at $150, and 41% voted for it at $250 (see the figure below).

Slide6The lower bound average willingness to pay per household across all respondents based on all questions was $138 in 2015 dollars.

STUDY 4 – NATIONAL SURVEYS in APRIL 2015

Study 4 implemented a similar design with more prices spreading across a wider range.  Specifically, it asked about five prices: $25, $75, $125, $225, and $350.

Respondents were asked:

As you may know, greenhouse gasses are put out by people when burning some types of fuel, such as gasoline.  Some people say that greenhouse gasses have been causing global warming.

The U.S. Congress considered a law that would reduce the amount of greenhouse gases that the United States puts out by 85% by the year 2050.

If this law would cause you to pay [randomly selected: $25, $75, $125, $225, $350] more for the things you buy, each year, beginning in 2016 [for randomly selected half of the respondents:  and the added cost would increase slightly each year], would you vote for this law or against it?”

As expected, the percentage of respondents voted for the program was highest, 47%, when the price was lowest, $25. Support declined when price increased, 44% for the price of $75,  and 42% and 41% when the price was $125 and $225, respectively. Support reached the lowest level of 37% when the price was the highest, $350 (see the figure below).

Slide7The lower bound of average willingness to pay per household across all respondents was $141 in 2015 dollars.

STUDY 5 – A NATIONAL SURVEY in 2007

An April 2007 poll estimated people’s willingness to shoulder tax costs for a more modest 5% cut in emissions by 2020. Three policy options were presented: mandates, with the government setting low carbon standards for businesses; taxes on greenhouse gas emissions; and a ‘cap and trade’ system – to reduce emissions from vehicle fuel and electricity sectors.

Respondents were told that each policy would result in an increase in fuel prices or electric bills. Questions citing different price increases were randomly assigned to respondents.  Willingness to support policies fell as cost grew.

In the case of gas prices, respondents were asked to vote at a price of $4, $7, or $15 per gallon by 2020. For electricity, respondents were asked to vote at a price of $2, $10, or $70 per month.  The people asked about the higher prices favored the policy less often, regardless of whether that increase was described as a mandate, tax, or cap-and-trade policy.

For full survey details, including statistical analyses, see this link.

Slide8

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References

  1. U.S. Environmental Protection Agency, (2010a) “Supplemental EPA Analysis of the American Clean Energy and Security Act of 2009,” January 29, 2010.
  2. U.S. Environmental Protection Agency, (2010b) “EPA Analysis of the American Power Act of 2010,” June 14, 2010.