Empirical project 11 Measuring willingness to pay for climate change mitigation
Learning objectives
In this project you will:
- construct indices to measure attitudes or opinions (Part 11.1)
- use Cronbach’s alpha to assess indices for internal consistency (Part 11.1)
- practise recoding and creating new variables (Part 11.1)
- compare survey measures of willingness to pay (Part 11.2).
Key concepts
- Concepts needed for this project: mean, standard deviation, correlation/correlation coefficient, confidence interval (for difference in means).
- Concepts introduced in this project: Likert scale (frequency scale) and Cronbach’s alpha.
Introduction
Core Economics website projects
This empirical project is related to material in:
When designing policies to reduce carbon emissions or air pollution, or to save an endangered species or preserve biodiversity, economists face the problem that markets for environmental amenities are missing. How can the value to people of the abatement of environmental damage be calculated and set against the cost of implementing any abatement?
- contingent valuation
- A survey-based technique used to assess the value of non-market resources. Also known as: stated-preference model.
The contingent valuation method asks people their willingness to pay (WTP), and so is called a stated-preference method. Alternative methods, including ‘revealed preference’, are explained in Section 20.6 of The Economy.
As explained in The Economy, a number of methods can be used to estimate the value of abatement. One method, called contingent valuation, involves asking people directly—for example, through a survey—how much they value the good.
Two common ways of obtaining information about willingness to pay (WTP) are:
- dichotomous choice (DC): presenting individuals with an amount, to which they respond with either ‘yes/willing to pay’ or ‘no/not willing to pay’ (sometimes a ‘no response’ option is also offered)
- a two-way payment ladder (TWPL): asking individuals to state the minimum and maximum amount they are willing to pay (selecting from a pre-specified list of amounts).
As with all subjective measures, both of these methods face different kinds of response biases. In this project, we ask whether they give the same results on average.
The issue of how to measure WTP for non-market goods, such as abatement of pollution, is important for policymaking. Incorrectly estimating the WTP may result in too much or too little abatement.
For estimates of the cost of abatement of greenhouse gases, see The Economy Figures 20.9 and 20.26 in Sections 20.3 and 20.10 respectively.
We will look at climate change mitigation as an example. Since tackling climate change may entail short-term costs such as reforestation of degraded forests, governments may want to know how much their citizens are willing to pay to reduce carbon emissions as a method of mitigating climate change.
The German government sponsored a nationwide online survey that investigated the effect of question format (DC or TWPL) on WTP responses. A representative sample of participants aged 18–69 were randomly assigned to either question format, and were asked their willingness to pay for a 10 percentage point increase in Germany’s carbon emissions reduction target (from 30% to 40%) by 2020 (compared to 1990). This scenario closely corresponds to Germany’s current climate change mitigation strategy.
In this survey, the list of WTP amounts for both question formats ranged from very low values (48 euros per household per year) to very high values (1,440 euros per household per year). We will be using this survey data to compare WTP (mean and median) under each method and assess whether WTP responses differ according to question formats.
