Why a carrier bag tax may work better

November 25, 2015 by Martha’s Dad

carriers-5239792The other Saturday, my dog Martha and I were waiting patiently outside M&S for our weekly treat of cheese scones.  Almost two months into the new policy, the main topic of conversation (ok, of complaining!) among passers-by was the new minimum charge for disposable carrier bags of 5p.

My favourite comment was the harassed parent encouraging her daughter to pay for a “bag for life” on the basis that it represented a better deal for her in the long run than for her mummy! England was the last country in the UK to introduce such a policy, of course, one which was in fact pioneered by Bangladesh and then Ireland, the latter seeing a reduction in carrier bag use by 90% in no time at all. But is the policy actually working.

The answer is “sort of”, as one might expect. The number of disposable bags being issued has declined in a relatively short space of time, but it is still the case that around 40% of English consumers are opting to pay the 5p rather than either bring their own or purchase a reusable bag-for-life option.  But why?  Well, as with so many things in life, the answer lies in some basic behavioural economics.  In particular, the natural tendency toward loss aversion probably accounts for much of the trend. We typically pay far more attention to losses than equivalent gains, so the 5p levy both focus attention on the cost and, through the related concept of anchoring, appears a much better (or ‘least-worst’) option than the reusable and more expensive bag-for-life choice.

The power of loss aversion really comes into its own, however, if we look at countries where the levy has been linked to taxation.  In England, the Government has deliberately made a huge issue of the fact this new charge will not find its way to the Treasury, yet another new tax would be very unpopular.  It’s just a requirement on the retailer to charge, that’s all. In terms of achieving serious reductions in bag usage, however, this reluctance to tax might be a little misguided, again thanks to our old friend loss aversion. A recent experiment by Homonoff in Washington DC found that charging a fee for a bag worked better than crediting the exact same amount to a customer’s bill when reusing their own bag. So far so good, loss aversion suggests that although the two are economically the same, we should pay more attention to the charge than we would the credit, making the former a more significant nudge of our behaviour.  The really interesting finding in this paper, and in others of a similar nature (e.g. by Taylor and Villas-Boas in San Francisco), is that the behaviour change only happens for those customers who bother to pay attention to the charge anyway or who are particularly sensitive to environmental concerns. The cost is relatively small, so many people just don’t notice it anyway, just as they probably don’t notice that a loaf of bread has gone up by 5p this week too. Most importantly, though, the effect is greatly amplified where another behavioural economic concept – the framing effect – comes into play. Presenting the 5p levy as an unavoidable tax, rather than an operational charge, enhances the stimulus salience considerably.  Put another way, precisely because we dislike taxation, we pay far more attention to the 5p and go the extra length (i.e. reusing a bag) to avoid paying it!

So, the message here is clear.  If we are serious about reducing bag usage and helping the environment, our hatred of taxes needs to form the basis of the nudge. A tax that goes directly to government would be far more effective than a compulsory charge that primarily benefits the retailer – which perhaps explains why Ireland achieved a 90% reduction in disposable bag usage almost overnight, while England two months on is struggling to achieve a mere 60%!