The Use of Green Nudges as an Environmental Policy Instrument

Green nudges are a new addition to the environmental policy maker’s tool kit. Using a new policy classification framework, we have shown that green nudges differ from self-focused nudges not in the type of intervention (i.e., how they change behavior) but in the reason for nudging. Specifically, self-focused nudges seek to improve the welfare of the individual by correcting for a behavioral problem (such as internalities or bounded rationality), while green nudges seek to reduce a negative environmental externality, which is a conventional economic problem. The fact that green nudges seek to address a conventional economic problem means that a direct comparison of green nudges and conventional policy tools is highly relevant because policy makers may need to decide between them when faced with a specific environmental policy problem. On the basis of an extensive review of the literature on green nudges, we have presented a theoretical comparison of green nudges and a Pigovian tax. We show that moral nudges (which affect both decision and experienced utility) can be welfare improving when implemented as a complement to optimal taxes. When taxes are not set optimally, both moral nudges and pure nudges (which affect only decision utility) can be efficiency-improving complements to taxes. Finally, we have discussed additional issues that policy makers need to consider when comparing green nudges with other polices, including distributional effects, the potential to crowd out intrinsic motivation, implementation costs, enforcement, and the external validity of experimental findings. Research that compares green nudges with conventional policy instruments is still in its very early stages. Thus, the discussions and findings we have presented here should be viewed as an effort aimed at asking the right questions rather than seeking to provide all the right answers. © 2021 Association of Environmental and Resource Economists. All rights reserved. Published by The University of Chicago Press for AERE.