Influence of Tax Policy on Green Power Utilization: An Empirical Investigation of Consumer Choice

1. Influence of Tax Policy on Green Power Utilization:An Empirical Investigation of Consumer Choice Wendy Wilhelm, Julie Lockhart, TJ Olney Western Washington University Bellingham, Washington

2. Area of Interest Effect of Tax Policy on Consumer Choice Compare Tax Policies: Tax on Nonrenewables (punishment) �Green Tax� (Polluter Pays) Subsidy on Renewables (reward) Income Tax Credit (Taxpayer Incentives) Could Tax Policy Motivate Consumers to Switch to �Green� Utility Providers? Our recent interest in environmental accounting involves how tax policy can be used to persuade consumers into a greater utilization of environmentally-friendly products. Specifically, we want to test the relative effectiveness of 2 different tax policies in persuading consumers to switch their electricity provider to one that utilizes more renewable fuels. This is really an evaluation of whether punishment, in the form of a tax added to a consumers monthly electric bill, is more or less effective at motivating the switch to green products than is a reward in the form of a tax credit applied to the consumers yearly income tax. DO YOU PREFER OUTLINE FORM: --Can tax policy pursuade consumers to switch? --Test 2 different policies on choosing electricity from renewable sources. --Best motivator: punish (tax on electric bill) vs reward (income tax credit) OTHER CHOICE IS JUST TO LOOK AT SLIDE AND USE IT AS PROMPT.Our recent interest in environmental accounting involves how tax policy can be used to persuade consumers into a greater utilization of environmentally-friendly products. Specifically, we want to test the relative effectiveness of 2 different tax policies in persuading consumers to switch their electricity provider to one that utilizes more renewable fuels. This is really an evaluation of whether punishment, in the form of a tax added to a consumers monthly electric bill, is more or less effective at motivating the switch to green products than is a reward in the form of a tax credit applied to the consumers yearly income tax. DO YOU PREFER OUTLINE FORM: --Can tax policy pursuade consumers to switch? --Test 2 different policies on choosing electricity from renewable sources. --Best motivator: punish (tax on electric bill) vs reward (income tax credit) OTHER CHOICE IS JUST TO LOOK AT SLIDE AND USE IT AS PROMPT.

3. Focus: Electrical Utilities Restructured electricity markets = residential customers can choose to purchase a green power product Low penetration rate (1-2%): WHY? Premium price of green product No financial incentives at consumer level Little customer knowledge about important product attributes Inertia Need for renewable fuel sources Consumption of electricity is expected to increase by 2% per year from 2000 to 2020. (Energy Information Administration 2001) Dependence on fossil fuels has made North America the top polluter in the category of toxic air emissions (Commission for Environmental Cooperation 2002)Consumption of electricity is expected to increase by 2% per year from 2000 to 2020. (Energy Information Administration 2001) Dependence on fossil fuels has made North America the top polluter in the category of toxic air emissions (Commission for Environmental Cooperation 2002)

4. Key Product Attributes in Consumer Choice of Electricity Products Price Financial incentives Brand name of product Reliability of Supplier Ease of participation Fuel mix Emissions profile

5. Goals of Our Study Identify relative importance of product attributes and attribute levels Explore role of one particular attribute - Tax Policy � in encouraging switching to renewable power sources Environmental Tax on nonrenewables (punishment) versus Tax Credit on renewables (reward) Expect Tax Credit to be more effective

6. Methods

7. Choice-Based Conjoint Analysis Validated Model for Assessing Consumer Preferences: Realism of Choice Task Combines Experimental Design Methods and Multivariate Analysis Based on models of discrete choice (logit) Interaction of product attributes is measured Results (part-worth utilities) can be used to: Determine attribute/levels importance Identify �ideal� product Simulate share of preference (market share) for a specified set of products

9. Methods: 5 Product Attributes Fuel mix (% electricity from renewable fuels) 5%; 25%; 50%; 75%; 95% Renewable Fuel Type Solar; Wind; Biomass; Hydro; Geothermal Emission profile (nonrenewable, vs. regional avg.) no change; 25% or 50% more or less Cost: Avg. monthly electric bill (before tax/credit) $40; $60; $80; $100; $120 (4-12 cents/kWh) Tax Policy: 10% or 20% Tax on nonrenewable fuel 10% or 20% Income Tax Credit, renewable fuel No Tax or Tax Credit

10. Methods:Respondents Asked to Assume May choose any offered electricity product 6 month trial period By current supplier May switch supplier after 6 month trial All sources highly & equally reliable

11. Methods: Sample Selection Pilot Study (2001)* CBC analysis Homeowners in WA Survey Sampling, Inc Probability Sample Owned PC/Windows 98 Disk by mail 1000 Disks Sent 228 responses (23%) Current Study CBC analysis Nationwide (USA) Survey Sampling, Inc Probability Sample Utility Bill payers Opt-in email panel Web-based 3000 emails sent 355 responses (12%)

13. Methods: Quantitative Analysis Choice Data: Multinomial Logit Hierarchical Bayes Chi-Square Part-worth utilities = importance �weights� Market Simulations Share of preference for various market scenarios: Scenario = set of products on market Share of Preference = Market Share

14. Results and Discussion

15. USA Sample Income $41,994 $45,500 High School 29% 33% College 16% 19% Female 51% 70% Causasian 75% 95% Results: Sample Demographics

16. Relative Importance of 5 Product Attributeson Choice of Electricity Product ? The relative importance of each attribute reflects how large an influence a product attribute has on choice of an electricity product. Importance weights are calculated by computing the difference between the largest and smallest part worth for each respondent for each attribute, summing the differences, and normalizing to 100. Attribute importances are ratio data. 2 This attribute did not have a statistically significant influence on choice because it is a conditional attribute, and thus its levels varied as a function of the other attribute levels. This does not necessarily mean it has an unimportant influence on choice. ? The relative importance of each attribute reflects how large an influence a product attribute has on choice of an electricity product. Importance weights are calculated by computing the difference between the largest and smallest part worth for each respondent for each attribute, summing the differences, and normalizing to 100. Attribute importances are ratio data. 2 This attribute did not have a statistically significant influence on choice because it is a conditional attribute, and thus its levels varied as a function of the other attribute levels. This does not necessarily mean it has an unimportant influence on choice.

17. Discussion: Product Attribute Cost is 3 times more important than the 2nd ranked attribute, Emissions Level Tax policy has a statistically significant influence on choice.

18. Ranking of Attribute Level Preferences

19. Discussion: Preference Ranking Consumers strongly prefer a Tax Credit on renewable sources to either Status Quo or to a Tax on nonrenewable sources. Consumers do not significantly differentiate between Solar, Wind, & Hydro sources.

20. Market Simulations:Two Products available: which preferred? Status Quo Green Renewable Sources 5% 95% Non-Renewable 95% 5% Emissions Avg. 50% less Cost (before tax/credit) $100 $120

22. Discussion: Effect of Tax Policy Certain fuel types may be insensitive to tax policy For those fuel types � wind, hydro, biomass - sensitive to tax policy: At least half of customers will choose a GP regardless of tax policy (even with a $20 premium) Asymmetrical Threshold Effect: 20% Credit = 10% Tax (GP=$97, SQ=$100) (GP=$120, SQ= $110) Both equally effective in motivating consumers to choose the green product (70-78% share)

23. Conclusions & Implications Cost remains most important consideration Tax policy impacts choice of an electricity product Effectiveness of tax policy varies with renewable Income tax credits are viable tools Encourages switching to green power products More politically viable than Environmental Tax Implications for government budgets Threshold level is important to effectiveness of tool Combination of policy tools Green tax could fund income tax credit Need education and awareness = relearn product category No demographic or psychographic differences

24. Limitations of Study Impact of income tax credit is deferred Tax would be applied to utility bill Assumptions: reliability & credibility of supplier Study sample: early adopters Findings limited to electricity products What about other green products? alternative fuel automobiles?

25. Teaching Applications Use as a case study in courses on Environmental Tax (Lockhart) & Consumer Behavior (Wilhelm) Use data in teaching conjoint analysis in Marketing Research course (Wilhelm) Include students in projects as co-authors, beta testers, respondents Promote discussion of how business concepts and tools can be applied to environmental and sustainability issues

26. THANK YOU!

27. Limitations of Green Tax Lobbying behavior Fear of competitive disadvantage Anti-tax sentiment Taxes don�t correctly price externalities Localized vs Pervasive (Daly & Cobb, 1989) �State Failure� (Andersen, 1994) Integrated pollution control strategies Punishment Strategy has Limited Efficacy

28. The Tax Credit Option Government must fund Used in US by State & Local Gov�t Shifts decisions to private sector Stimulates innovative solutions Not always appropriate May be more acceptable politically Reward Strategy May Provide Better Results Tax credits may not always be appropriate if they reward a behavior that is already controlled through regulation. However, this can stimulate business.Tax credits may not always be appropriate if they reward a behavior that is already controlled through regulation. However, this can stimulate business.

29. Hypotheses H1: Tax Policy is a significant factor in determining choice of a residential electricity product. H2: An income tax credit on a green electricity product is preferred over an environmental tax on a non-renewable electricity product, all else being equal. H3: Consumers are indifferent between a non-renewable electricity product with a 10% tax and a green product with a 20% tax credit.

30. Methods: Survey Choice-based conjoint Survey Preference for various electricity products 10 randomized choice tasks Importance of electricity product attributes 3 fixed tasks Predictive Validity + 1st task = trial run Other questions Predictors of pro-environment behavior Randomized for each respondent

33. Discussion: Power of Tax Credit When given a choice between status quo, 10% Tax, or 10% Tax Credit, more than half of consumers choose Credit. 15% more consumers will convert to Green electrical products with a 20% Credit than with a 10% Credit.

34. Remarks Main effects model Income tax credit preferred Interaction effects 10% tax on nonrenewable 20% credit on renewable For wind, hydro, biomass Threshold implications Overall finding� green products preferred until they cost more!