Discussion Papers

Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the {SO}2 cap-and-trade system. That system performed well but created four striking ironies. First, by creating this system to reduce {SO}2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system‘s cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, since this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the {SO}2 market, demonstrating that what the government gives, the government can take away.

Billions of hours are spent each year on water collection in developing countries. This paper explores whether improvements in water technology enable changes in household time allocation patterns and, thereby, productivity gains. To do so, it exploits differences in the timing of shared public water tap construction across Kyrgyz villages to provide evidence on the extent to which such changes in time allocation are aided by access to better water infrastructure, a technology that decreases the labor intensity of home production. Households in villages that receive this labor-saving technological improvement are, on average, 15% more likely to be within 200 meters of their water source. This, in turn, reduced the time intensity of home production activities that are impacted by water, such as bathing, going to the doctor, and caring for children. Village-level incidence of acute intestinal infections amongst children fell by 30%. Although adults themselves show no signs of improved health, they benefit from the reductions in time spent caring for sick children. These reductions in the time intensity of home production allowed for greater time allocated towards leisure activities and market labor, specifically work on the household farm. As a result, average production of cash crops (specifically, cereals such as wheat and barley) increased by 645 kilograms per household per year. The labor supply and productivity estimates imply a rate of return to labor valuing approximately \$0.43/hour, which mirrors the hourly wage for farm labor. Taken together, these results suggest that the main channel of influence through which productivity gains were realized was increased labor supply in an environment where the classic separation of household production and consumption activities appears to hold.

The outcome of the December 2011 United Nations climate negotiations in Durban, South Africa, provides an important new opportunity to move toward an international climate policy architecture that is capable of delivering broad international participation and significant global {CO}2 emissions reductions at reasonable cost. We evaluate one important component of potential climate policy architecture for the post-Durban era: links among independent tradable permit systems for greenhouse gases. Because linkage reduces the cost of achieving given targets, there is tremendous pressure to link existing and planned cap-and-trade systems, and in fact, a number of links already or will soon exist. We draw on recent political and economic experience with linkage to evaluate potential roles that linkage may play in post-Durban international climate policy, both in a near-term, de facto architecture of indirect links between regional, national, and sub-national cap-and-trade systems, and in longer-term, more comprehensive bottom-up architecture of direct links. Although linkage will certainly help to reduce long-term abatement costs, it may also serve as an effective mechanism for building institutional and political structure to support a future climate agreement.

Gasoline taxes can be employed to correct externalities associated with automobile use, to reduce dependency on foreign oil, and to raise government revenue. Our understanding of the optimal gasoline tax and the efficacy of existing taxes is largely based on empirical analysis of consumer responses to gasoline price changes. In this paper, we directly examine how gasoline taxes affect consumer behavior as distinct from tax-exclusive gasoline prices. Our analysis shows that a 5-cent tax increase reduces gasoline consumption by 1.3 percent in the short-run, much larger than that from a 5-cent increase in the tax-exclusive gasoline price. This difference suggests that traditional analysis could significantly underestimate policy impacts of tax changes. We further investigate the differential effect from gasoline taxes and tax-exclusive gasoline prices on both the intensive and extensive margins of gasoline consumption. We discuss implications of our findings for the estimation of the implicit discount rate for vehicle purchases and for the fiscal benefits of raising taxes.

This paper compares total emissions of a uniformly mixing pollutant and welfare levels of a large country in autarky and with free trade with another large country that does not implement any environmental policies. There is intra-industry trade between the two countries which is modeled by using the ideal variety approach. Two abatement technologies are considered, a clean technology approach and an end-of-pipe approach. Emissions are influenced by an emission tax. With clean technology abatement emissions may be lower in the free trade regime than in autarky, with end-of-pipe abatement total emissions are greater with free trade. With both methods of abatement under free trade no emission tax may be levied at all if emissions per unit of output are very large, and if the gains from intra-industry trade due to an increase of available varieties are relatively small, autarky may yield a higher welfare level than free trade.

Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market‐based instruments in the form of carbon‐pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap‐and‐trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.

US natural gas prices fell in 2009 on account of weak demand and increased supply from shale gas production. The fall in prices led to a reduction in coalfired electricity generation and a concomitant increase in natural gas-fired electricity generation. Low natural gas prices conjoined with static coal prices and underutilized natural gas power plant capacity to create an environment primed for switching from natural gas to coal. Due to differences in chemical make-ups and plant efficiencies between the two fuels, this switching led to a significant reduction in carbon dioxide emissions. This thesis models how the fuel switching effect occurred and how it translated to an emissions reduction. It also analyzes several hypothetical policies aimed at augmenting the effect to achieve further reductions in emissions. Throughout the analysis, it considers the other impacts— environmental, human health, and economic—of a large-scale shift from a fuel system based on coal to one based on natural gas.

The use of market based instruments in developing countries is rapidly expanding, particularly in environmental policy. Several different market mechanisms theoretically lead to efficient allocation of investments in environmental quality without ex post trading, though their empirical performance in these contexts remains untested. This study provides the first evidence from a developing country field experiment to directly compare alternative allocation mechanisms: a uniform-price, sealed bid procurement auction and a posted o¤er market. The experiment was conducted in Malawi for the allocation of tree planting contracts. Results reveal highly divergent outcomes for the two strategically equivalent mechanisms. The auction set the clearing price for both mechanisms and enrolled the 38 percent of the auction treatment group that bid below the price. In the posted offer treatment group, 99.5 percent of participants accepted the contract at that price. Compliance results show significantly more trees surviving per contract allocated under the auction. Results point to a violation of procedure invariance and show a tradeoff between quantity and quality across the two mechanisms. The auction achieves a better selection of high compliance landholders, but potentially at greater cost than the posted offer market.

Homebuyers make their purchase decisions based on a number of structural, environmental and neighborhood characteristics. Using Geographic Information Systems data and a hedonic price model this study attempts to empirically demonstrate the value placed on one of the environmental characteristics: unobstructed mountain views. Home sales data from Buncombe County, North Carolina in 2005 provided 626 observations, from which a log-linear model was employed to assess the impact of view degradation measured by the number of houses visible from an observer house. The study hopes to further the discussion of ideal land-use policy given the mutually exclusive nature of land development and scenic view maintenance.

We examine an implication of the “Coase Theorem” which has had an important impact both on environmental economics and on public policy in the environmental domain. Under certain conditions, the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights. That is, the overall cost of achieving a given aggregate emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation. We call this the independence property. This property is very important because it allows equity and efficiency concerns to be separated in a relatively straightforward manner. In particular, the property means that the government can establish the overall pollution-reduction goal for a cap-and-trade system by setting the cap, and leave it up to the legislature – such as the U.S. Congress – to construct a constituency in support of the program by allocating the allowances to various interests without affecting either the environmental performance of the system or its aggregate social costs. Our primary objective in this paper is to examine the conditions under which the independence property is likely to hold – both in theory and in practice. A number of factors can call the independence property into question theoretically, including market power, transaction costs, non-cost-minimizing behavior, and conditional allowance allocations. We find that, in practice, there is support for the independence property in some, but not all cap-and-trade applications.

A critical issue in climate change economics is the specification of the so-called "damages function" and its interaction with the unknown uncertainty of catastrophic outcomes. This paper asks how much we might be misled by our economic assessment of climate change when we employ a conventional quadratic damages function and/or a thin-tailed probability distribution for extreme temperatures. The paper gives some numerical examples of the indirect value of various GHG concentration targets as insurance against catastrophic climate change temperatures and damages. These numerical examples suggest that we might be underestimating considerably the welfare losses from uncertainty by using a quadratic damages function and/or a thin-tailed temperature distribution. In these examples, the primary reason for keeping GHG levels down is to insure against high-temperature catastrophic climate risks.

China urbanization is associated with both increases in per-capita income and greenhouse gas emissions. This paper uses micro data to rank 74 major Chinese cities with respect to their household carbon footprint. We find that the “greenest” cities based on this criterion are Huaian and Suqian while the “dirtiest” cities are Daqing and Mudanjiang. Even in the dirtiest city (Daqing), a standardized household produces only one-fifth of that in America’s greenest city (San Diego). We find that the average January temperature is strongly negatively correlated with a city’s household carbon footprint, which suggests that current regional economic development policies that bolster the growth of China’s northeastern cities are likely to increase emissions. We use our city specific income elasticity estimates to predict the growth of carbon emissions in China’s cities.

Federal action addressing climate change is likely to emerge either through new legislation or via the U.S. EPA’s authority under the Clean Air Act. The prospect of federal action raises important questions regarding the interconnections between federal efforts and state-level climate policy developments. In the presence of federal policies, to what extent will state efforts be cost-effective? How does the co-existence of state- and federal-level policies affect the ability of state efforts to achieve emissions reductions?

This paper addresses these questions. We find that state-level policy in the presence of a federal policy can be beneficial or problematic, depending on the nature of the overlap between the two systems, the relative stringency of the efforts, and the types of policy instruments engaged. When the federal policy sets limits on aggregate emissions quantities, or allows manufacturers or facilities to average performance across states, the emission reductions accomplished by a subset of U.S. states may reduce pressure on the constraints posed by the federal policy, thereby freeing facilities or manufacturers to increase emissions in other states. This leads to serious “emissions leakage” and a loss of cost-effectiveness at the national level. In contrast, when the federal policy sets prices for emissions or does not allow manufactures to average performance across states, these difficulties are usually avoided. Even in circumstances involving problematic interactions, there may be other attractions of state-level climate policy. We evaluate a number of arguments that have been made to support state-level climate policy in the presence of federal policies, even when problematic interactions arise.

It is striking how often countries with oil or other natural resource wealth have failed to grow more rapidly than those without. This is the phenomenon known as the Natural Resource Curse. The principle is not confined to individual anecdotes or case studies, but has been borne out in some econometric tests of the determinants of economic performance across a comprehensive sample of countries. This paper considers seven aspects of commodity wealth, each of interest in its own right, but each also a channel that some have suggested could lead to sub-standard economic performance. They are: long-term trends in world commodity prices, volatility, permanent crowding out of manufacturing, poor institutions, unsustainability, war, and cyclical Dutch Disease. Skeptics have questioned the Natural Resource Curse, pointing to examples of commodity exporting countries that have done well and arguing that resource exports and booms are not exogenous. Clearly the relevant policy question for a country with natural resources is how to make the best of them. The paper concludes with a consideration of ideas for institutions that could help a country that is endowed with, for example, oil overcome the pitfalls of the Curse and achieve good economic performance. The most promising ideas include indexation of oil contracts, hedging of export proceeds, denomination of debt in terms of oil, Chilestyle fiscal rules, a monetary target that emphasizes product prices, transparent commodity funds, and lump-sum distribution.