Written by Harry Spencer, Senior Account Manager – Madano Energy

You may not be familiar with the work of Danny Kahneman, but Environment Secretary Michael Gove definitely is.

Kahneman won a Nobel Prize in Economics for his work with Amos Tversky into the psychological biases that influence decision-making.

During his brief leadership campaign, Michael Gove referred to some of Kahneman’s research, and now he is staking his flagship policy on one of Kahneman’s insights – loss aversion.

The idea is that people feel losses much more significantly than gains of equal value – and that this bias shows itself in how they behave. Typically, that losses are felt roughly twice as strongly as gains of the same actual value.

Kahneman gives a less scientific story to summarise the idea:

“In my classes, I say: ‘I’m going to toss a coin, and if it’s tails, you lose $10. How much would you have to gain on winning in order for this gamble to be acceptable to you?’ People want more than $20 before it is acceptable.”

This insight has been at the core of one of the Government’s biggest environmental successes of recent years – the charge on single-use plastic bags. The charge has reduced use by an estimated 83% resulting in 9 billion fewer bags being sold.

Yet it has had such a dramatic effect despite being an additional cost of only 5p per bag.

This isn’t a one-off either: other countries which introduced similar charges found similarly huge effects. When Denmark introduced it in 2003, they found a 66% drop in use of single-use plastic bags.

Loss aversion explains why such a tiny charge can have such a big impact. People had been used to receiving the bag for free. The introduction of a charge, however minimal, was felt as a direct loss.

In addition, the fact that people are asked whether they wish to pay 5p for an additional plastic bag – rather than simply having 5p added to their bill for every bag they use without being asked – heightens its impact. Many customers would not even notice a 5p surcharge to their overall bill, but will certainly notice if asked whether they want to spend 5p to get a plastic bag.

So when Michael Gove announced last month that the Government will introduce a deposit-return scheme for plastic bottles and cans, whereby customers have to pay an additional charge at point of purchase, which they can recover if they recycle the products in question, it is reasonable to assume he has been reading his behavioural economics again.

But can the UK be nudged into becoming a more sustainable society?

Scepticism is justified. It’s notable that while the use of single-use plastic bags may have dropped dramatically, there is little sign of total waste dropping – in fact, it has risen modestly since the plastic bag charge was brought in.

More broadly, while carefully designed policies like the plastic bag charge can have a huge effect on consumer behaviour there are three problems with this approach.

Firstly, a large proportion of waste occurs in the supply chain, before it ever reaches the customer.

Second, sometimes nudges fail to produce significant consumer effects. Certainly, as the stubbornly low recycling rate indicates, there are problems which defy simple nudges.

Finally, nudges are subject to the law of diminishing returns. Simply replicating the plastic bag charge on lots of other items is likely to dilute the effectiveness of all these approaches. And while the plastic bag charge substantially cut use on its introduction, it’s not clear that the policy alone will further reduce use, and therefore waste, in future.

The crunch point coming later this year is the broader review of taxation of plastic. To make a substantial difference, it will very likely take more than a few nudges from Government. 

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