HEEP Publications

Park, Jisung. “Will We Adapt? Labor Productivity and Adaptation to Climate Change.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2017.Abstract

This study explores the for labor-related production impacts of temperature stress both for its own interest and to understand the scope for adaptation to climate change. Focusing on non-agricultural output, I find that hot temperature exerts a significant causal impact on local labor product, with substantially larger effects in highly ex-posed industries such as construction, manufacturing, and transportation. Places that experience more extreme heat exposure in expectation (e.g. Houston, Orlando) exhibit lower impacts per hot day than cooler regions (e.g. Boston, San Francisco). A year with 10 additional 90°F days would reduce output per capita in highly exposed sectors by -3.5% in counties in the coldest quintile and -1.3%, roughly a third, in the warmest quintile. County-level air-conditioning penetration explains a large proportion of these differences. While these estimates suggest adaptation to heat stress in the long-run, they also imply realistic limits, at least given current technologies.

Weitzman, Martin L.On a World Climate Assembly and the Social Cost of Carbon.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016.Abstract

This paper postulates the conceptually useful allegory of a futuristic "World Climate Assembly" (WCA) that votes for a single worldwide price on carbon emissions via the basic democratic principle of one-person one-vote majority rule. If this WCA framework can be accepted in the first place, then voting on a single internationally-binding minimum carbon price (the proceeds from which are domestically retained) tends to counter self-interest by incentivizing countries or agents to internalize the externality. I attempt to sketch out the sense in which each WCA-agent's extra cost from a higher emissions price is counter-balanced by that agent's extra benefit from inducing all other WCA-agents to simultaneously lower their emissions in response to the higher price. The first proposition of this paper derives a relatively simple formula relating each emitter's single-peaked most-preferred world price of carbon emissions to the world "Social Cost of Carbon" (SCC). The second and third propositions relate the WCA-voted world price of carbon to the world SCC. I argue that the WCA-voted price and the SCC are unlikely to differ sharply. Some implications are discussed. The overall methodology of the paper is a mixture of mostly classical with some behavioral economics.

Haefele, Michelle, John Loomis, and Linda J. Bilmes. “Total Economic Valuation of the National Park Service Lands and Programs: Results of a Survey of the American Public.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016. dp71_haefele-loomis-bilmes.pdf
Sullivan, Daniel M.The True Cost of Air Pollution: Evidence from House Prices and Migration.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016.Abstract

In this paper, I present evidence that current economics research significantly underestimates the effects of air pollution, regardless of the outcome of interest. This bias exists even in quasi-experimental estimates and arises from the way researchers define individual-level pollution exposure. A polluter’s effect on nearby residents changes dramatically with the direction of the wind, and most popular methods, including geographic diff-in-diffs and monitor-based interpolations, are unable to account for such sharp changes in exposure over short distances. To solve this problem, I use an atmospheric dispersion model, which explicitly accounts for meteorological conditions, to determine the effect of every polluting firm on every house in greater Los Angeles. I then estimate the effect of NOx emissions on house prices and neighborhood composition using the exogenous variation in emissions caused by the California Electricity Crisis of 2000 and a cap-and-trade program in greater Los Angeles. The estimated price response is much larger than past estimates and implies that the social value of the cap-and-trade program is roughly \$502 million per year, 15 times larger than the associated abatement costs. However, when based on conventional measures of pollution exposure, this estimated valuation is small and statistically indistinguishable from zero. The estimated neighborhood sorting response suggests that, despite the high aggregate value, low-income households may not have benefited much from the improvement in air quality.

Stolper, Samuel. “Who Bears the Burden of Energy Taxes? The Critical Role of Pass-Through.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016.Abstract

Existing estimates of energy tax incidence assume that the pass-through of taxes to final consumer prices is uniform across the affected population. I show that, in fact, variation in local market conditions drives significant heterogeneity in pass-through, and ignoring this can lead to mistaken conclusions about the distributional impacts of energy taxes. I use data from the Spanish retail automotive fuel market to estimate station-specific pass-through, focusing on the effects of competition and wealth. A novel informational mandate provides access to a national, station-daily panel of retail diesel prices and characteristics and allows me to investigate market composition at a fine level. Event study and difference-in-differences regression reveal that, while retail prices rise nearly one-for-one (100%) with taxes on average, station-specific pass-through rates range from at least 70% to 115%. Greater market power – measured by brand concentration and spatial isolation – is strongly associated with higher pass-through, even after conditioning on detailed demand-side characteristics. Furthermore, pass-through rises monotonically in area-average house prices. While a conventional estimate of the Spanish diesel tax burden suggests roughly equivalent incidence across the wealth distribution, overlaying the effect of heterogeneous pass-through reveals the tax to be unambiguously progressive.

Chen, Cuicui, and Richard Zeckhauser. “Collective Action in an Asymmetric World.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016.Abstract

A central authority possessing tax and expenditure responsibilities can readily provide an efficient level of a public good. Absent a central authority, the case with climate change mitigation, voluntary arrangements must replace coercive arrangements; significant under-provision must be expected. Potential contributors have strong incentives to free ride, or to ride cheaply. International public goods are particularly challenging. The players - the nations of the world - are many and they start in quite different circumstances. Voluntary arrangements that might emerge from negotiations fall short for two reasons: First, players frame negotiations from their own standpoint, making stalemate likely. Second, the focal-point solution where contributions are proportional to benefits clashes with the disproportionate incentives little players have to ride cheaply. We identify a solution, the Cheap- Riding Efficient Equilibrium, which defines the relative contributions of players of differing size (or preference intensity) to reflect cheap riding incentives, yet still achieves Pareto optimality. Players start by establishing the Alliance/Nash Equilibrium as a base point. From that point they apply either the principles of the Lindahl Equilibrium or the Nash Bargaining Solution to proceed to the Pareto frontier. The former benefits from its focal-point properties; the latter is a standard analytic tool addressing bargaining. We apply our theory to climate change by first examining the Nordhaus Climate Club proposal. We then test the Alliance Equilibrium model using individual nations' Intended Nationally Determined Contributions pledged at the Paris Climate Change Conference. As hypothesized, larger nations made much larger pledges in proportion to their Gross National Incomes.

duPont, Carolyn M., James N. Levitt, and Linda J. Bilmes. “Green Bonds and Land Conservation: The Evolution of a New Financing Tool.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2016.Abstract

"Green Bonds" emerged as a new form of environmental financing in 2007. While most investors still view them as a niche product in the overall fixed income market, green bonds have grown rapidly to nearly \$37 billion in issuance in 2014, with issuers from the World Bank to the State of Massachusetts. This paper examines the current and potential future use of green bonds for financing sustainable land use and conservation projects around the world. The paper draws on interviews with land conservation practitioners, bond issuers, investors, and financial analysts, as well as analysis of two case studies in China and Massachusetts. The paper summarizes the key insights from this community of experts, and lays out a series of steps that will be required before green bonds can develop into a significant and reliable tool in the conservation finance toolkit. The authors find that projects linked to water and stormwater management may be investment “sweet spots” for green bonds and land conservation.

Schmalensee, Richard, and Robert N. Stavins. “Lessons Learned from Three Decades of Experience with Cap-and-Trade.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015.Abstract

This essay provides an overview of the major emissions trading programs of the past thirty years on which significant documentation exists, and draws a number of important lessons for future applications of this environmental policy instrument. References to a larger number of other emissions trading programs that have been implemented or proposed are included.

Weitzman, Martin L. “Internationally-Tradable Permits Can Be Riskier for a Country than an Internally-Imposed Carbon Price.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015.Abstract

This paper compares internationally-tradeable permits with a uniform carbon price, as seen through the lens of an individual country. To ensure a level playing field, these two approaches are initially calibrated to be welfare-equivalent for the country in a deterministic setting. While both price and quantity instruments have identical consequences under perfect certainty, outcomes differ substantially when uncertainty is introduced. The uncertainty analyzed here takes the reduced form of idiosyncratic country-specific abatement-cost shocks. Then, because of cross-border revenue flows, internationally-tradable permits can expose a country to greater risk than the imposition of a uniform carbon price (whose revenue proceeds are domestically retained). This result is formalized in a very simple model that highlights the core essence of the argument. Some implications are discussed. I suggest that this relative-riskiness result may be a pertinent consideration in choosing between negotiated price-based approaches and negotiated quantity-based approaches for controlling worldwide carbon emissions.

Henderson, Rebecca. “Making the Business Case for Environmental Sustainability.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015. dp64_henderson.pdf
Bhanot, Syon. “Rank and Response: A Field Experiment on Peer Information and Water Use Behavior.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015.Abstract

Perception of social rank, or how we perform relative to our peers, can be a powerful motivator. While research exists on the effect of social information on decision making, there is less work on how ranked comparisons with our peers influence our behavior. This paper outlines a field experiment conducted with 5,180 households in Castro Valley, California, which used household mailers with various forms of peer information and social rank messaging to motivate water conservation. The experiment tests the effect of a visible social rank on water use, and how the cooperative and competitive framing of rank information influences behavioral response. Difference-in-difference and matching methods reveal sizable treatment effects of the mailers on household water use (reductions of 13-17 gallons per day, depending on mailer version). However, households with relatively low or high water use in the pre-treatment period responded differently to information framing. We find that neutrally-framed rank information caused a "boomerang effect" (i.e., an increase in average water use) for low water use households, but this effect was eliminated by competitive framing. At the same time, competitively-framed rank information demotivated high water use households, increasing their average water use further. This result is supported by evidence that the competitive frame on rank information increased water use for households who ranked "last" in the peer group - a detrimental "last place effect" from competitive framing.

Metcalf, Gilbert, and James H Stock. “The Role of Integrated Assessment Models in Climate Policy: A User’s Guide and Assessment.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015.Abstract

This paper considers the role of integrated assessment models (IAMs) in the construction of climate policy. We focus on questions involving the role of IAMs in estimating the social cost of carbon (SCC), how best to handle the considerable scientific uncertainty underlying the IAMs from the perspective of estimating the SCC, and whether an IAM‐based SCC should be abandoned and replaced by expert judgment or another substitute. The perspective we adopt in tackling these questions is rooted in the specific needs of the existing U.S. institutions responsible for making and implementing climate policy, specifically regulatory agencies within the Executive Branch and Congress should it choose to take up climate legislation. Our discussion has three premises. First, policy makers need a numerical value and an uncertainty range for the SCC for policy evaluation and implementation. Second, whatever the true value of the SCC is, it is not zero. Third, considerable uncertainty surrounds the current state of scientific knowledge about the current and future costs of climate change. The evolving nature of the science and the ultimate goal of informing first‐best policy suggests to us that the official SCC – the SCC used for regulatory analysis by the U.S. Government – should not be thought of as a single number or even a range of numbers, but more broadly as a process that yields updated estimates of those numbers and ranges. Viewed in this way, the ultimate goal of the process is scientific credibility, public acceptance, and political and legal viability.

Coglianese, John, Lucas W Davis, Lutz Kilian, and James H Stock. “Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand.” Cambridge, Massachusetts, USA: Harvard Environmental Economics Program, 2015.Abstract

Traditional least squares estimates of the responsiveness of gasoline consumption to changes in gasoline prices are biased toward zero, given the endogeneity of gasoline prices. A seemingly natural solution to this problem is to instrument for gasoline prices using gasoline taxes, but this approach tends to yield implausibly large price elasticities. We demonstrate that anticipatory behavior provides an important explanation for this result. We provide evidence that gasoline buyers increase gasoline purchases before tax increases and delay gasoline purchases before tax decreases. This intertemporal substitution renders the tax instrument endogenous, invalidating conventional IV analysis. We show that including suitable leads and lags in the regression restores the validity of the IV estimator, resulting in much lower and more plausible elasticity estimates. Our analysis has implications more broadly for the IV analysis of markets in which buyers may store purchases for future consumption.

Gerarden, Todd D., Richard G. Newell, and Robert N. Stavins. “Assessing the Energy-Efficiency Gap.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2015.Abstract

Energy-efficient technologies offer considerable promise for reducing the financial costs and environmental damages associated with energy use, but these technologies appear not to be adopted by consumers and businesses to the degree that would apparently be justified, even on a purely financial basis. We present two complementary frameworks for understanding this so-called “energy paradox” or “energy-efficiency gap.” First, we build on the previous literature by dividing potential explanations for the energy-efficiency gap into three categories: market failures, behavioral anomalies, and model and measurement errors. Second, we posit that it is useful to think in terms of the fundamental elements of cost-minimizing energy-efficiency decisions. This provides a decomposition that organizes thinking around four questions. First, are product offerings and pricing economically efficient? Second, are energy operating costs inefficiently priced and/or understood? Third, are product choices cost-minimizing in present value terms? Fourth, do other costs inhibit more energy-efficient decisions? We review empirical evidence on these questions, with an emphasis on recent advances, and offer suggestions for future research.

Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. “The Value of Regulatory Discretion: Estimates from Environmental Inspections in India.” Cambridge, Massachusetts, {USA}: Harvard Project on Climate Agreements, 2015.Abstract

In collaboration with a state environmental regulator in India, we conducted a field experiment to raise the frequency of environmental inspections to the prescribed minimum for a random set of industrial plants. The treatment was successful when judged by process measures, as treatment plants, relative to the control group, were more than twice as likely to be inspected and to be cited for violating pollution standards. Yet the treatment was weaker for more consequential outcomes: the regulator was no more likely to identify extreme polluters (i.e., plants with emissions five times the regulatory standard or more) or to impose costly penalties in the treatment group. In response to the added scrutiny, treatment plants only marginally increased compliance with standards and did not significantly reduce mean pollution emissions. To explain these results and recover the full costs of environmental regulation,we model the regulatory process as a dynamic discrete game where the regulator chooses whether to penalize and plants choose whether to abate to avoid future sanctions. We estimate this model using original data on 10,000 interactions between plants and the regulator. Our estimates imply that the costs of environmental regulation are largely reserved for extremely polluting plants. Applying the cost estimates to the experimental data, we find the average treatment inspection imposes about half the cost on plants that the average control inspection does, because the randomly assigned inspections in the treatment are less likely than normal discretionary inspections to target such extreme polluters.

Houde, Sebastien, and Joseph E Aldy. “Belt and Suspenders and More: The Incremental Impact of Energy Efficiency Subsidies in the Presence of Existing Policy Instruments.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

The effectiveness of investment subsidies depends on the existing array of regulatory and information mandates, especially in the energy efficiency space. Some consumers respond to information disclosure by purchasing energy-efficient durables (and thus may increase the inframarginal take-up of a subsequent subsidy), while other consumers may locate at the lower bound of a minimum efficiency standard (and a given subsidy may be insufficient to change their investment toward a more energy-efficient option). We investigate the incremental impact of energy efficiency rebates in the context of regulatory and information mandates by evaluating the State Energy Efficient Appliance Rebate Program (SEEARP) implemented through the 2009 American Recovery and Reinvestment Act. The design of the program – Federal funds allocated to states on a per capita basis with significant discretion in state program design and implementation – facilitates our empirical analysis. Using transaction-level data on appliance sales, we show that most program participants were inframarginal due to important short-term intertemporal substitutions where consumers delayed their purchases by a few weeks. We find evidence that some consumers accelerated the replacement of their old appliances by a few years, but overall the impact of the program on ong-term energy demand is likely to be very small. Our estimated measures of cost-effectiveness are an order of magnitude higher than estimated for other energy efficiency programs in the literature. We also show that designing subsidies that reflect, in part, underlying attribute-based regulatory mandates can result in perverse effects, such as upgrading to larger, less energy-efficient models.

dp59_houde-aldy.pdf pb1_houde-aldy.pdf
Frankel, Jeffrey. “National Security and Domestic Oil Depletion.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

American politicians often take it for granted that national security would be enhanced by accelerating domestic oil production, through policies such as subsidies, tax advantages, opening up federal lands for drilling at artificially low charges, and relaxing environmental regulation. This note argues that such policies actually hurt national security in the long term, by depleting domestic reserves. It proposes saving some of the deposits located offshore and under shale beds for a future emergency, by withholding federal permits for now, by reversing current artificial subsidies to production, and by a tax to encourage conservation.

Aldy, Joseph E. “The Labor Market Impacts of the 2010 Deepwater Horizon Oil Spill and Offshore Oil Drilling Moratorium.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

In 2010, the Gulf Coast experienced the largest oil spill, the greatest mobilization of spill response resources, and the first Gulf-wide deepwater drilling moratorium in U.S. history. Taking advantage of the unexpected nature of the spill and drilling moratorium, I estimate the net effects of these events on Gulf Coast employment and wages. Despite predictions of major job losses in Louisiana – resulting from the spill and the drilling moratorium – I find that Louisiana coastal parishes, and oil-intensive parishes in particular, experienced a net increase in employment and wages. In contrast, Gulf Coast Florida counties, especially those south of the Panhandle, experienced a decline in employment. Analysis of accommodation industry employment and wage, business establishment count, sales tax, and commercial air arrival data likewise show positive economic activity impacts in the oil-intensive coastal parishes of Louisiana and reduced economic activity along the Non-Panhandle Florida Gulf Coast.

Glaeser, Edward L. “The Supply of Environmentalism.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

Long before economics turned to psychology, environmentalists were nudging and framing and pushing their cause like highly gifted amateur psychologists. Their interventions seem to have changed behavior by altering beliefs, norms and preferences, but because psychological interventions are often coarse, inadvertent, offsetting side effects occur. After discussing the interplay between environmental preference-making and economics, I turn to three areas where strong, simple views have spread—electric cars, recycling and local conservation efforts. In all three areas, environmental rules of thumb can lead to significant, adverse environmental side effects. Local environmentalism, for example, may increase carbon emissions by pushing development from low emission areas, like coastal California, to high emissions areas elsewhere. I end by discussing how economic analysis of the political market for ideas can make sense of the remarkable disparity of views on global warming.

Martin, Ian WR, and Robert S Pindyck. “Averting Catastrophes: The Strange Economics of Scylla and Charybdis.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

How should we evaluate public policies or projects to avert, or reduce the likeli- hood of, a catastrophic event? Examples might include inspection and surveillance programs to avert nuclear terrorism, investments in vaccine technologies to help respond to a {\textbackslash}mega- virus," or the construction of levees to avert major ooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-benet framework. But be- cause society faces multiple potential catastrophes, simple cost-benet analysis breaks down: Even if the benet of averting each one exceeds the cost, we should not necessarily avert all of them. We explore the policy interdependence of catastrophic events, and show that con- sidering these events in isolation can lead to policies that are far from optimal. We develop a rule for determining which events should be averted and which should not.