HEEP Discussion Papers

2024
Bistline, John, Kimberly A. Clausing, Neil Mehrotra, James H. Stock, and Catherine Wolfram. “Climate Policy Reform Options in 2025,” 2024. Publisher's VersionAbstract
With the expiration of many tax cuts and unmet climate targets, 2025 could be a crucial year for climate policy in the United States. Using an integrated model of energy supply and demand, this paper aims to assess climate policies that the U.S. federal government may consider in 2025 and to evaluate emissions reductions, fiscal costs and revenues, and household energy expenditures across a range of policy scenarios. Model results suggest that the emissions reductions of the Inflation Reduction Act are significantly augmented under scenarios that add a modest carbon fee or, to a lesser extent, that implement a clean electricity standard in the power sector. Second, net fiscal costs can be substantially reduced in scenarios that include a carbon fee, especially if fossil fuel exports are taxed. Third, expanding the IRA tax credits yields modest additional emissions reductions with higher fiscal costs. Finally, although none of the policy combinations across these scenarios achieve the U.S. target of a 50-52% economy-wide emissions reduction by 2030 from 2005 levels, the carbon fee and clean electricity standard scenarios achieve these levels between 2030 and 2035.
climate_policy_reform_options_in_2025.pdf
2023
Bilal, Adrien, and Esteban Rossi-Hansberg. “Anticipating Climate Change Across the United States.” Harvard Environmental Economics Program, no. dp\_94 (2023): 23-94.Abstract
We evaluate how anticipation and adaptation shape the aggregate and local costs of climate change. We develop a dynamic spatial model of the U.S. economy and its 3,143 counties that features costly forward-looking migration and capital investment decisions. Recent methodological advances that leverage the `Master Equation' representation of the economy make the model tractable. We estimate the county-level impact of severe storms and heat waves over the 20th century on local income, population, and investment. The estimated impact of storms matches that of capital depreciation shocks in the model, while heat waves resemble combined amenity and productivity shocks. We then estimate migration and investment elasticities, as well as the structural damage functions, by matching these reduced-form results in our framework. Our findings show, first, that the impact of climate on capital depreciation magnifies the U.S. aggregate welfare costs of climate change twofold to nearly 5in 2023 under a business-as-usual warming scenario. Second, anticipation of future climate damages amplifies climate-induced worker and investment mobility, as workers and capitalists foresee the slow build-up of climate change. Third, migration reduces substantially the spatial variance in the welfare impact of climate change. Although both anticipation and migration are important for local impacts, their effect on aggregate U.S. losses from climate change is small.
dp94_bilal_rossi_hansberg.pdf
2022
Aldy, Joseph E.Learning How to Build Back Better through Clean Energy Policy Evaluation,” 2022, dp\_93.Abstract

The Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act authorized and appropriated unprecedented spending and tax expenditures to decarbonize the American economy. In the spirit of “build back better,” this paper examines how integrating evaluation in the design and implementation of these new clean energy policies can facilitate the learning necessary for policymakers to make policy better over time. It draws lessons from two case studies: (1) on institutionalizing evaluation based on the experience with regulatory review, and (2) on conducting evaluation based on the research literature assessing the 2009 Recovery Act’s clean energy programs. The paper identifies in recent legislation the programs and their characteristics amenable to various evaluation methodologies. The paper closes with recommendations for a clean energy program evaluation framework that would enable implementation of climate-oriented learning agendas under the Evidence-Based Policymaking Act.

Keywords: program evaluation, learning agendas, renewable energy, energy efficiency

dp93_aldy.pdf
Aldy, Joseph E., and Zachery M Halem. “The Evolving Role of Greenhouse Gas Emission Offsets in Combating Climate Change,” 2022, dp\_92.Abstract

As governments, firms, and universities advance ambitious greenhouse gas emission goals, the demand for emission offsets – projects that reduce or remove emissions relative to a counterfactual scenario – will increase. Reservations about an offset’s additionality, permanence, double-counting, and leakage pose environmental, economic, and political challenges. We review the role of offsets in regulatory compliance, as an incentive for early action, and in implementing voluntary emission goals. The rules and institutions governing offsets drive large variations in prices and in the types of projects deployed to reduce or remove emissions across offset programs. A lack of carbon price convergence and potential information asymmetries may contribute to limited price discovery and market segmentation. Taking into account the financial properties of offsets, an array of financial and technological innovations could enhance offsets’ environmental integrity and promote liquid offset markets. Unresolved questions about the future of policy will influence the evolution of voluntary offsets markets.    

Keywords: climate change, certified emission reductions, offsets, cap-and-trade, corporate social responsibility

JEL Codes: Q54, Q52, Q58, H23

dp92_aldy-halem.pdf
2021
Ramelli, Stefano, Alexander Wagner, Alexandre Ziegler, and Richard Zeckhauser. “Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections.” Harvard Environmental Economics Program, 2021.Abstract
Donald Trump’s 2016 election and his nomination of climate skeptic Scott Pruitt to head the Environmental Protection Agency drastically downshifted expectations on U.S. policy toward climate change. Joseph Biden’s 2020 election shifted them dramatically upward. We study firms’ stock-price movements in reaction. As expected, the 2016 election boosted carbon-intensive firms. Surprisingly, firms with climate-responsible strategies also gained, especially those firms held by long-run investors. Such investors appear to have bet on a ‘‘boomerang’’ in climate policy. Harbingers of a boomerang already appeared during Trump’s term. The 2020 election marked its arrival. (JEL G14, G38, G41)
dp_91_ramelli_et_al.pdf
Aldy, Joseph E., Giles Atkinson, and Matthew Kotchen. “Environmental Benefit-Cost Analysis: A Comparative Analysis Between the United States and the United Kingdom.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2021.Abstract
The United States and United Kingdom have longstanding traditions in use of environmental benefit-cost analysis (E-BCA). While there are similarities between how E-BCA is utilized, there are significant differences too, many of which mirror ongoing debates and recent developments in the literature on environmental and natural resource economics. We review the use of E-BCA in both countries across three themes: (a) the role of long-term discounting; (b) the estimation and use of carbon valuation; and, (c) the estimation and use of the value of a statistical life. In each case, we discuss how academic developments are (and are not) translated into use and draw comparative lessons. We find that, in some cases, practical differences in E-BCA can be overstated, although in others these seem more substantive. Advances in the academic frontier also raise the question of when and how to update practical E-BCA, with very different answers across our themes.
dp_90_aldy_et_al.pdf
Aldy, Joseph, Matthew Kotchen, Mary Evans, Meredith Fowlie, Arik Levinson, and Karen Palmer. “Co-Benefits and Regulatory Impact Analysis: Theory and Evidence from Federal Air Quality Regulations.” Discussion Paper (2021): 45.Abstract
This paper considers the treatment of co-benefits in benefit-cost analysis of federal air quality regulations. Using a comprehensive data set on all major Clean Air Act rules issued by the Environmental Protection Agency over the period 1997-2019, we show that (1) co-benefits make up a significant share of the monetized benefits; (2) among the categories of co-benefits, those associated with reductions in fine particulate matter are the most significant; and (3) co-benefits have been pivotal to the quantified net benefit calculation in nearly half of cases. Motivated by these trends, we develop a simple conceptual framework that illustrates a critical point: co-benefits are simply a semantic category of benefits that should be included in benefit-cost analyses. We also address common concerns about whether the inclusion of co-benefits is problematic because of alternative regulatory approaches that may be more cost-effective and the possibility for double counting.
dp_89_aldy_et_al.pdf
Evans, Mary, Karen Palmer, Joseph Aldy, Meredith Fowlie, Matthew Kotchen, and Arik Levinson. “The Role of Retrospective Analysis in an Era of Deregulation: Lessons from the U.S. Mercury Air Toxic Standards.” Harvard Environmental Economics Program, 2021.Abstract
As of late 2020, the Trump administration had initiated almost one hundred rollbacks of U.S. environmental regulations. A careful assessment of the benefits and costs of rolling back an existing regulation can and should inform such decisions. When assessing the potential rollback of an existing regulation, analysts can often learn from the regulation’s implementation through retrospective analysis as well as from advances in scientific knowledge. We discuss recent actions concerning the Mercury and Air Toxics Standards (MATS) to illustrate the potential lessons from doing so. In the case of MATS, advances in science have shed light on broader exposure pathways and previously unquantified health effects, suggesting that the benefits of reducing mercury emissions may exceed previous estimates. At the same time, changes in the energy sector have altered the mix of fuels used to produce electricity, which impacts both the benefits and costs of the regulation.
dp_88_evans_et_al._final.pdf
2020
Aldy, Joseph E., and Robert N. Stavins. “Rolling the Dice in the Corridors of Power: William Nordhaus's Impacts on Climate Change Policy.” Harvard Environmental Economics Program Discussion Paper Series (2020).Abstract
The seminal contributions of William Nordhaus to scholarship on the long-run macroeconomics of global climate change are clear. Much more challenging to identify are the impacts of Nordhaus and his research on public policy in this domain. We examine three conceptually distinct pathways for that influence: his personal participation in the policy world; his research’s direct contribution to the formulation and evaluation of public policy; and his research’s indirect role informing public policy. Many of the themes that emerge in this assessment of the contributions of one of the most important economists to have worked in the domain of climate change analysis apply more broadly to the roles played by other leading economists in this and other policy domains.
dp_87_aldy_stavins_rolling_the_dice_heep.pdf
Metcalf, Gilbert, and James H. Stock. “Measuring the Macroeconomic Impact of Carbon Taxes.” Harvard Environmental Economics Program Discussion Paper Series (2020).Abstract
Economists have long argued that a carbon tax is a cost effective way to reduce greenhouse gas emissions. Increasingly, members of Congress agree. In 2019, seven carbon tax bills were filed in Congress (Kaufman et al., 2019). In addition, the Climate Leadership Council has built bipartisan support for a carbon tax and dividend plan (Baker et al., 2017). In contrast, the Trump Administration is retreating from any climate policy and has taken steps to withdraw from the Paris Accord, citing heavy economic costs to the U.S. economy from meeting the U.S. commitments made during the Obama Administration. In his June 1, 2017 statement on the Accord, for example, the President claimed that the cost to the economy would be “close to \$3 trillion in lost GDP and 6.5 million industrial jobs…” (Trump, 2017). What is the basis for claims about the economic impact of a carbon tax? Economic impacts of a carbon tax typically are estimated using computable general equilibrium (CGE) models (as was done for the report on which Trump based his claims). These models, while helpful, make many simplifying assumptions to remain tractable, including optimization, representative agents, and simplified expectations and dynamics, so at a minimum those estimates would ideally be complemented by empirical evidence on the macroeconomic effects of carbon taxes in practice. With carbon taxes in place in twenty-five countries around the world, including some dating to the early 1990s, empirical analysis of historical experience is now possible. This paper considers carbon taxes in Europe to estimate their impact on GDP and employment.
dp_86_metcalf_stock.pdf
Stock, James H.Climate Change, Climate Policy, and Economic Growth.” Harvard Environmental Economics Program Discussion Paper Series (2020). dp_85_stock.pdf
Sunstein, Cass R.Internalities, Externalities, and Fuel Economy.” Harvard Environmental Economics Program Discussion Paper Series (2020).Abstract
It is standard to think that corrective taxes, responding to externalities, are generally or always better than regulatory mandates, but in the face of behavioral market failures, that conclusion might not be right. Fuel economy and energy efficiency mandates are possible examples. Because such mandates might produce billions of dollars in annual consumer savings, they might have very high net benefits, complicating the choice between such mandates and externality-correcting taxes (such as carbon taxes). The net benefits of mandates that simultaneously reduce internalities and externalities might exceed the net benefits of taxes that reduce externalities alone, even if mandates turn out to be a highly inefficient way of reducing externalities. An important qualification is that corrective taxes might be designed to reduce both externalities and internalities, in which case they would almost certainly be preferable to a regulatory mandate.
dp_84_sunstein.pdf
Aldy, Joseph E., Maximillian Auffhammer, Maureen Cropper, Arthur Fraas, and Richard Morgenstern. “Looking Back at Fifty Years of the Clean Air Act.” Harvard Environmental Economics Program Discussion Paper Series, 2020.Abstract
Since 1970, transportation, power generation, and manufacturing have dramatically transformed as air pollutant emissions have fallen significantly. To evaluate the causal impacts of the Clean Air Act on these changes, we synthesize and review retrospective analyses of air quality regulations. The geographic heterogeneity in regulatory stringency common to many regulations has important implications for emissions, public health, compliance costs, and employment. Cap-and-trade programs have delivered greater emission reductions at lower cost than conventional regulatory mandates, but policy practice has fallen short of the cost-effective ideal. Implementing regulations in imperfectly competitive markets have also influenced the Clean Air Act’s benefits and costs.
dp_83_aldy_looking_back_at_fifty_years_clean_air_act.pdf
Stock, James H.Data Gaps and the Policy Response to the Novel Coronavirus.” Harvard Environmental Economics Program Discussion Paper Series (2020).Abstract
This note lays out the basic Susceptible-Infected-Recovered (SIR) epidemiological model of contagion, with a target audience of economists who want a framework for understanding the effects of social distancing and containment policies on the evolution of contagion and interactions with the economy. A key parameter, the asymptomatic rate (the fraction of the infected that are not tested under current guidelines), is not well estimated in the literature because tests for the coronavirus have been targeted at the sick and vulnerable, however it could be estimated by random sampling of the population. In this simple model, different policies that yield the same transmission rate β have the same health outcomes but can have very different economic costs. Thus, one way to frame the economics of shutdown policy is as finding the most efficient policies to achieve a given β, then determining the path of β that trades off the economic cost against the cost of excess lives lost by overwhelming the health care system.
dp_82_stock_data_gaps_policy_response_novel_coronavirus.pdf
2019
Stavins, Robert. “The Future of U.S. Carbon-Pricing Policy.” Harvard Environmental Economics Program Discussion Paper (2019).Abstract
There is widespread agreement among economists – and a diverse set of other policy analysts – that at least in the long run, an economy-wide carbon pricing system will be an essential element of any national policy that can achieve meaningful reductions of CO2 emissions cost-effectively in the United States. There is less agreement, however, among economists and others in the policy community regarding the choice of specific carbon-pricing policy instrument, with some supporting carbon taxes and others favoring cap-and-trade mechanisms. This prompts two important questions. Which – if either – of the two major approaches to carbon pricing is superior in terms of relevant criteria, including but not limited to efficiency, cost-effectiveness, and distributional equity? And which of the two approaches is more likely to be adopted in the future in the United States? This paper addresses these questions by drawing on both normative and positive theories of policy instrument choice as they apply to U.S. climate change policy, and draws extensively on relevant empirical evidence. The paper concludes with a look at the path ahead, including an assessment of how the two carbon-pricing instruments can be made more politically acceptable.
dp_81_stavins_future_of_u.s._carbon-pricing_policy.pdf
Stavins, Robert, Todd Schatzki, and Rebecca Scott. “Transitioning To Long-Run Effective and Efficient Climate Policies.” Harvard Environmental Economics Program, 2019. dp_80_stavins_schatzki_scott_2019.pdf
2018
Richard, Schmalensee, and Robert Stavins. “Policy Evolution Under the Clean Air Act.” Harvard Environmental Economics Program, 2018.Abstract
The U.S. Clean Air Act, passed in 1970 with strong bipartisan support, was the first environmental law to give the Federal government a serious regulatory role, established the architecture of the U.S. air pollution control system, and became a model for subsequent environmental laws in the United States and globally. We outline the Act’s key provisions, as well as the main changes Congress has made to it over time. We assess the evolution of air pollution control policy under the Clean Air Act, with particular attention to the types of policy instruments used. We provide a generic assessment of the major types of policy instruments, and we trace and assess the historical evolution of EPA’s policy instrument use, with particular focus on the increased use of market-based policy instruments, beginning in the 1970s and culminating in the 1990s. Over the past fifty years, air pollution regulation has gradually become much more complex, and over the past twenty years, policy debates have become increasingly partisan and polarized, to the point that it has become impossible to amend the Act or pass other legislation to address the new threat of climate change.
dp_79_schmalensee-stavins_clean_air_act.pdf
Schatzki, Todd, and R. N. Stavins. “Key Issues Facing California's GHG Cap-and-Trade System for 2021-2030.” Cambridge, MA: Harvard Environmental Economics Program, 2018.Abstract
California’s Greenhouse Gas (GHG) cap-and-trade program is a key element of the suite of policies the State has adopted to achieve its climate policy goals. The passage of AB 398 (California Global Warming Solutions Act of 2006: market-based compliance mechanisms) extended the use of the cap-and-trade program for the 2021-2030 period, while also specifying modifications of the program’s “cost containment” structure and directing CARB to “[e]valuate and address concerns related to overallocation in [ARB’s] determination of the allowances available for years 2021 to 2030.” The changes being considered by CARB will not only affect the program’s stringency, but also its performance by affecting the ability of the “cost containment” structure to mitigate allowance price volatility and the risk of suddenly escalating allowance prices.
schatzki_stavins_dp_78.pdf
Gerarden, Todd D.Demanding Innovation: The Impact of Consumer Subsidies on Solar Panel Production Costs.” Cambridge, MA: Harvard Environmental Economics Program, 2018.Abstract
This paper analyzes the impacts of consumer subsidies in the global market for solar panels. Consumer subsidies can have at least two effects. First, subsidies shift out demand and increase equilibrium quantities, holding production costs fixed. Second, subsidies may encourage firms to innovate to reduce their costs over time. I quantify these impacts by estimating a dynamic structural model of competition among solar panel manufacturers. The model produces two key insights. First, ignoring long-run supply responses can generate biased estimates of the effects of government policy. Without accounting for induced innovation, subsidies increased global solar adoption 49 percent over the period 2010-2015, leading to over \$15 billion in external social benefits. Accounting for induced innovation increases the external benefits by at least 22 percent. Second, decentralized government intervention in a global market is inefficient. A subsidy in one country increases long-run solar adoption elsewhere because it increases investment in innovation by international firms. This spillover underscores the need for international coordination to address climate change.
gerarden_dp_77.pdf
Chen, Cuicui. “Slow Focus: Belief Evolution in the U.S. Acid Rain Program.” Cambridge, MA: Harvard Environmental Economics Program, 2018.Abstract
I study firm behavior in new markets by examining coal-dependent private electric utili-ties’ beliefs about the sulfur dioxide allowance price following the implementation of the U.S. Acid Rain Program. The program is the first large-scale cap-and-trade program, exposing the electric utility industry to a wholly novel market for pollution allowances. I estimate firms’ beliefs about the allowance price from 1995 to 2003 using a firm-level dynamic model of allowance trades, coal quality, and emission reduction investment. I find that firms ini-tially underestimate the role of market fundamentals as a driver of allowance prices, but over time their beliefs appear to converge toward the stochastic process of allowance prices. Such beliefs in the first five years of the program cost firms around 10% of their profits. Beliefs also change the relative efficiency of cap-and-trade programs and emission taxes.
chen_dp76.pdf

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