Loss aversion: the concept every supplier should be utilising to tackle climate change

India Loader, South Wilts Grammar School

India Loader, from South Wilts Grammar School, is the winner of the third Bank of England/Financial Times schools blog competition. The competition invited students across the UK to write a post on the theme: the economy and climate change.

To help save the planet and gain a competitive edge, cafes should obey a basic rule of behavioural economics by switching from offering discounts for customers who bring their own cups in favour of charging more for disposable ones.

Consider the astronomical success of the introduction of a 5p charge on plastic bags by British supermarkets. Volumes plummeted by over 86 per cent — an unexpectedly high proportion when the majority of consumers would not even pick up a 5p coin if they saw it lying in the street.

Yet there has been a muted response to the more substantial discounts offered to consumers bringing re-usable cups to cafes for their morning coffee — of up to 50p at Pret A Manger. Up to 55 per cent of shoppers remember to carry their reusable grocery bags to save just 5p, while fewer than 2 per cent of coffee drinkers bring their own cup.

Given that they could save up to ten times as much, why are consumers responding to two seemingly similar scenarios in profoundly different ways? I put it down to the behavioural economics theory of ‘loss aversion’.

Loss aversion arises when the cost associated with giving something up is perceived as greater than the benefit that would accrue from the acquisition of the same thing. This behavioural concept is clearly evident in how consumers react to bringing a re-usable bag or a re-usable cup.

There are many instances in which suppliers offer monetary incentives to promote environmental practices even when it may be significantly more effective to introduce a fine. Just a tweak of policy can often have a disproportionately positive effect.

So to encourage the use of re-usable cups, scrap the discount and introduce a small charge for those who demand disposables. This would play to consumers’ tendency to go to greater lengths to avoid a loss than to seek an equivalent gain.

Starbucks is the first large coffee chain to have rolled out a charge (of 5p) on their paper cups. Given a fantastic consumer response — with three times more people now bringing their own cup — it is baffling why other businesses are not taking the same approach. 

One possibility is that they worry the practice may make them less price competitive: charging 5p for a cup amounts to raising the price of the product for the majority. However, if businesses like Starbucks are transparent about the environmental benefits of the 5p charge, as many supermarkets have been, it could actually increase competitiveness by attracting the rapidly growing number of environmentally conscious consumers. Tackling climate change may begin at the level of the individual. But if businesses can nudge their customers to consume sustainably then by applying behavioural economic theories such as loss aversion, we will have a significantly greater chance of controlling waste before it takes an irreversible toll on the environment.

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