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Emission Tax, Health Insurance, and Information: A Mechanism Design for Reducing Energy Consumption and Emission Risk

Author

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  • Chiradip Chatterjee

    (University of North Florida)

  • Nafisa Halim

    (Boston University)

  • Pallab Mozumder

    (Florida International University)

Abstract

A major share of the energy demand in the United States and around the world is met by energy sources derived from conventional fossil fuels. Combustion of fossil fuels causes serious emission of greenhouse gases and particle pollution, that translates into health hazards. Consumption of renewable energy can help reduce the carbon footprint and cut down the health risk. In this study we present results from a lab experiment in which subjects participated in a context-rich, incentivized game with elements of an impure public good, risk, and intertemporal discounting. The subjects played the role of a household head to decide on how much to spend on energy saving technologies. The spending reduced the future energy cost and emission, as well as emission related health risk and associated medical costs for everyone in the group. The discounting was characterized by allowing to save with interest earnings across multiple rounds. Each subject played three sections (baseline, a treatment, and a repeated baseline) and each section was comprised of 30 rounds. The treatment had a threshold public good feature, where the emission tax level was dependent on the overall energy-saving investments made by the group. Subjects exhibited significant learning and wealth effect in adopting more energy saving technologies over time. Furthermore, subjected were given the option to purchase health insurance to mitigate risk. The result shows that the adoption rate is higher when the emission tax is framed as a reward rather than a punishment and average energy savings are crowded out with the option to purchase health insurance. However, on average subjects who decide to purchase health insurance also save more energy than those who refuse to purchase it.

Suggested Citation

  • Chiradip Chatterjee & Nafisa Halim & Pallab Mozumder, 2021. "Emission Tax, Health Insurance, and Information: A Mechanism Design for Reducing Energy Consumption and Emission Risk," Economics of Disasters and Climate Change, Springer, vol. 5(3), pages 465-480, October.
    • Handle: RePEc:spr:ediscc:v:5:y:2021:i:3:d:10.1007_s41885-021-00093-4
    DOI: 10.1007/s41885-021-00093-4
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