When policymakers need to encourage energy conservation, they face a difficult decision. They can appeal to their constituents’ sense of morality, which is often seen as ineffective, or they can increase the price of energy, which is likely to be unpopular.

Authors Koichiro Ito, Takanori Ida, and Makoto Tanaka examine these options in the February issue of the American Economic Journal: Economic Policy. They find that, although both strategies induce short-run reductions in electricity usage, economic incentives have a larger and more persistent effect than moral suasion.

The authors run an experiment and compare the energy usage of three groups: a control group, a group that received messages asking them to voluntarily conserve energy during peak demand, and a group that experienced peak-demand electricity price increases ranging from an additional 40 to 80 cents per kilowatt-hour.

People who received the voluntary messages initially reduced their usage by eight percent. However, they largely stopped conserving electricity after a few messages and only began to respond again after a three-month break from the treatment. People who experienced price increases had average reductions of 14 to 18 percent, depending on the exact additional cost. The figure below compares these effects.

Figure 2 from Ito et al. (2018)