The (indirect) Effects of Windfall Funds on Sustainability Behavior: Insights for Carbon Fee Dividends

Abstract

Addressing global climate change continues to challenge decision-makers and citizens alike. In the United States, legislation involving a carbon tax and dividend is increasingly discussed to help move away from the heavy reliance on carbon-based fuels and encourage investment in energy innovations that meet energy demands. The purpose of the dividend would be to reallocate collected fees to American residents who may spend it as they choose. Analysis suggests that many households (60%+) will receive a larger dividend payment than their increased energy cost from the tax. However, whether the reallocation and spending of such funds would support or detract from efforts to pivot away from carbon fuels and towards energy conservation and/or innovation remains unknown. A growing body of work indicates that people act quite differently depending on how money, including policy incentives such as the proposed reallocation of fees in the Carbon Dividend Trust Fund, has become entrusted to them. Of particular importance to the current study is whether all types of windfall are perceived, and acted upon, equally. Specifically, if the government (in the form of the Carbon Dividend Trust) is taxing carbon (or carbon-equivalent) emissions to encourage lower individual use, will people change their behavior and limit or expand their own conservation efforts because the government is involved? Our paper is motivated by this open question and broader inquiries from the literature regarding behavior from windfall funds and linked sustainability behaviors. This article contributes three ways to the literature on windfall effects and behavioral spillover. First, we examine whether the source of windfall funding (a subsidy, tax refund, or no information on the source) impacts an individual’s stated future sustainability behavior. Second, we investigate if a threshold windfall amount must exist before we see changes in stated sustainable behavior. Third, we explicitly examine heterogeneity in response to windfall funding. Moreover, this study was designed to directly investigate important policy questions surrounding legislation like the Carbon Dividend Act. Our results show that the source of money substantially influences behavior and must be carefully considered when analyzing policy that intends to reallocate funds for citizens to spend as they see fit. Importantly, our paper serves as a reminder that there is a lot we don’t know about the indirect impacts of a carbon fee and dividend approach and provides insight into various avenues for future research.