Conference Agenda

Despite their desirable properties, carbon taxes have received low public support. Leading explanations attribute the rejection of carbon taxes to preferences and ideology. We show that voters make simple mistakes when reasoning about the consequences of such policies. We focus on leading versions of carbon taxes that are designed to draw wide public support by issuing dividend payments from collected revenues, resulting in a policy that is progressive and produces more winners than losers. Using experiments, we show that subjects have specific blind spots in reasoning about policies with taxes and dividends, even when described in simple terms and in incentivized, abstract settings that remove scope for preferences and ideologies. Based on these findings, we introduce a new policy that is isomorphic to a leading carbon tax proposal, but engineered to be robust to these cognitive frictions. In a U.S. survey, we find that our new policy (which we call "carbon penalty and reward") garners 30 percentage points more public support than the original proposal (known as "carbon fee and dividend"). Using independent measures, we show that this increase in support is concentrated in people who have difficulty reasoning about the policy structure.