Behavioral Economics and the Energy Crisis in Europe

Blog by Carlos Scartascini: “European nations, stunned by Russia’s aggression, have mostly rallied in support of Ukraine, sending weapons and welcoming millions of refugees. But European citizens are paying dearly for it. Apart from the costs in direct assistance, the energy conflict with Russia had sent prices of gas soaring to eight times their 10-year average by the end of September and helped push inflation to around 10%. With a partial embargo of Russian oil going into effect in December and cold weather coming, many Europeans now fear an icy, bitter and poorer winter of 2023.

European governments hope to take the edge off by enacting price regulations, providing energy subsidies for households, and crucially curbing energy demand. Germany’s government, for example, imposed limits on heating in public offices and buildings to 19 degrees Celsius (66.2 Fahrenheit). France has introduced a raft of voluntary measures ranging from asking public officials to travel by train rather than car, suggesting that municipalities swap old lamps for LEDs and designing incentives to get people to car share…

As we know from years of experiments at the IDB in using behavioral economics to achieve policy goals, however, rules and recommendations are not enough. Trust in fellow citizens and in the government are also crucial when calling for a shared sacrifice. That means not appealing to fear, which can lead to deeper divisions in society, energy hoarding, resignation and indifference. Rather, it means appealing to social norms of morality and community.

In using behavioral economics to boost tax compliance in Argentina, for example, we found that sending messages that revealed how fellow citizens were paying their taxes significantly improved tax collection. Revealing how the government was using tax funds to improve people’s lives provided an additional boost to the effort. Posters and television ads in Europe showing people wearing sweaters, turning down their thermostats, insulating their homes and putting up solar panels might similarly instill a sense of common purpose. And signals that governments are trying to relieve hardship might help instill in citizens the need for sacrifice…(More)”.