Green Transition with Dynamic Social Preferences

TL;DR

This paper explores how considering evolving social preferences in green consumption can optimize tax policies, enabling lower taxes and smoother transitions with minimal welfare loss.

Contribution

It introduces a model that integrates social preference externalities into green tax policy analysis, highlighting benefits of accounting for social norms.

Findings

Lower tax rates are feasible when social externalities are considered.

Gradual tax reductions can be stable and welfare-enhancing.

Policy-preference interactions improve green transition strategies.

Abstract

We examine a green transition policy involving a tax on brown goods in an economy where preferences for green consumption consist of a constant intrinsic individual component and an evolving social component. We analyse equilibrium dynamics when social preferences exert a positive externality in green consumption, creating complementarity between policy and preferences. The results show that accounting for this externality allows for a lower tax rate compared to policy ignoring the social norm effects. Furthermore, stability conditions permit gradual tax reductions or even removal along the transition path, minimising welfare losses. Thus, incorporating policy-preference interactions improves green transition policy design.