HEEP Discussion Papers

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.

Covert, Thomas R. “Experiential and Social Learning in Firms: The Case of Hydraulic Fracturing in the Bakken Shale.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

Learning how to utilize new technologies is a key step in innovation, yet little is known about how firms actually learn. This paper examines firms' learning behavior using data on their operational choices, profits, and information sets. I study companies using hydraulic fracturing in North Dakota's Bakken Shale formation, where firms must learn the relationship between fracking input use and oil production. Using a new dataset that covers every well since the introduction of fracking to this forma- tion, I find that firms made more profitable input choices over time, but did so slowly and incompletely, only capturing 67% of possible profits from fracking at the end of 2011. To understand what factors may have limited learning, I estimate a model of fracking input use in the presence of technology un- certainty. Firms are more likely to make fracking input choices with higher expected profits and lower standard deviation of profits, consistent with passive learning but not active experimentation. Most firms over-weight their own information relative to observable information generated by others. These results suggest the existence of economically important frictions in the learning process.

dp53_covert.pdf dp53_covert_two-page-summary.pdf
Heal, Geoffrey M, and Jisung Park. “Feeling the Heat: Temperature, Physiology & the Wealth of Nations.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

Does temperature affect economic performance? Has temperature always affected social welfare through its impact on physical and cognitive function? While many studies have explored the indirect links between climate and welfare (e.g. agricultural yield, violent conflict, or sea-level rise), few address the possibility of direct impacts operating through human physiology. This paper presents a model of labor supply under thermal stress, building on a longstanding physiological literature linking thermal stress to health and task performance. A key prediction is that effective labor supply – defined as a composite of labor hours, task performance, and effort – is decreasing in temperature deviations from the biological optimum. We use country-level panel data on population-weighted average temperature and income (1950-2005), to illustrate the potential magnitude of the effect. Using a fixed effects estimation strategy, we find that hotter-than-average years are associated with lower output per capita for already hot countries and higher output per capita for cold countries: approximately 3%-4% in both directions. We then use household data on air conditioning and heating expenditures from the {US} to provide further evidence in support of a physiologically based causal mechanism. This more direct causal link between climate and social welfare has important implications for both the economics of climate change and comparative development.

Aldy, Joseph E, and Seamus J Smyth. “Heterogeneity in the Value of Life.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

We develop a numerical life-cycle model with choice over consumption and leisure, stochastic mortalityand labor income processes, and calibrated to U.S. data to characterize willingness to pay ({WTP})for mortality risk reduction. Our theoretical framework can explain many empirical findings in thisliterature, including an inverted-U life-cycle {WTP} and an order of magnitude difference in prime-aged adults {WTP}. By endogenizing leisure and employing multiple income measures, we reconcilethe literature's large variation in estimated income elasticities. By accounting for gender- and race-specific stochastic mortality and income processes, we explain the literature's black-white and female-male differences.

Allcott, Hunt, and Richard Sweeney. “Information Disclosure through Agents: Evidence from a Field Experiment.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2014.Abstract

With a large nationwide retailer, we run a natural field experiment to measure the effects of energy use information disclosure, rebates, and sales agent incentives on demand for energy efficient durable goods. Sales incentives and rebates are complementary, but information and sales incentives alone have statistically and economically insignificant effects. Sales agents comply only partially with the experiment, targeting information at the most interested consumers but not discussing energy efficiency with the disinterested majority. In follow-up surveys, most consumers are aware of the energy efficient model and may even overestimate its benefits, suggesting that imperfect information is not a major barrier to adoption in this context.

dp52_allcott-sweeney.pdf dp52_allcott-sweeney_two-page-summary.pdf
Seo, Hee Kwon. “Can Behavioral Biases Explain Demand for a Harmful Pesticide? Evidence from India.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

Millions of cotton farmers in India use Monocrotophos, a pesticide that is both toxic—the level of exposure found in the field is linked to irreversible cognitive impairment, depression and suicidal tendencies—and inferior in efficacy to other safer, similar cost alternatives. I use three experiments to test whether misperception and inferential challenges created by a habit of mixing different inputs together explain why farmers fail to abandon Monocrotophos. I conduct a brief information campaign that reduces farmers’ self-reported plans to purchase the pesticide for the next planting season by 37%. I show how the campaign addresses behavioral biases. I discuss implications for public health policy interventions and general lessons for thinking about mechanisms for technology selection in markets where “unlearning” specious product benefits may be difficult due to psychological and behavioral stumbling blocks.

Kopczuk, Wojciech, Justin Marion, Erich Muehlegger, and Joel Slemrod. “Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-through of State Diesel Taxes.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results indicate that moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.

dp50_muehlegger-etal.pdf dp50_muehlegger-etal_two-page-summary.pdf
Talbott, Will. “Lighting the Way: Unlocking Performance Gains in Electricity Distribution and Retailing in India.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013. dp46_talbott.pdf
Drake, David F, and Stefan Spinler. “Sustainable Operations Management: An enduring stream or a passing fancy?” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

Paul Kleindorfer was among the first to weigh in on and nurture the stream of Sustainable Operations Management. The thoughts laid out here are based on conversations we had with Paul relating to the drivers underlying sustainability as a management issue: population and per capita consumption growth, the limited nature of resources and sinks, and the responsibility and exposure of firms to ensuing ecological risks and costs. We then discuss how an operations management lens contributes to the issue, and criteria to help the Sustainable Operations Management perspective endure. This article relates to a presentation delivered by Morris Cohen for Paul’s Manufacturing and Service Operations Management Distinguished Fellows Award, given at Columbia University, June 18, 2012. We wrote this article at Paul’s request.

Weitzman, Martin. “A Voting Architecture for the Governance of Free-Driver Externalities, with Application to Geoengineering.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

Climate change is a global "free rider" problem because significant abatement of greenhouse gases is an expensive public good requiring international cooperation to apportion compliance among states. But it is also a global "free driver" problem because geoengineering the stratosphere with reflective particles to block incoming solar radiation is so cheap that it could essentially be undertaken unilaterally by one state perceiving itself to be in peril. This paper develops the main features of a "free driver" externality in a simple model based on the asymmetric consequences of type-I and type-{II} errors. I propose a social-choice decision architecture embodying the solution concept of a supermajority voting rule and derive its basic properties. In the model this supermajority voting rule attains the socially optimal cooperative solution, which is a new theoretical result around which the paper is built.

Herrnstadt, Evan, and Erich Muehlegger. “Weather, Salience of Climate Change and Congressional Voting.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

Climate change is a complex long-run phenomenon. The speed and severity with which it is occurring is difficult to observe, complicating the formation of beliefs for individuals. We use Google Insights search intensity data as a proxy for the salience of climate change and examine how search patterns vary with unusual local weather. We find that searches for "climate change" and "global warming" increase with extreme temperatures and unusual lack of snow. The responsiveness to weather shocks is greater in states that are more reliant on climate-sensitive industries and that elect more environmentally-favorable congressional delegations. Furthermore, we demonstrate that effects of abnormal weather extend beyond search behavior to observable action on environmental issues. We examine the voting records of members of the U.S. Congress from 2004 to 2011 and find that members are more likely to take a pro-environment stance on votes when their home-state experiences unusual weather.

Cicala, Steve. “When Does Regulation Distort Costs? Lessons from Fuel Procurement in U.S. Electricity Generation.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2013.Abstract

Under what conditions does cost-of-service regulation lead firms to distort costs? This paper analyzes changes in fuel procurement practices by coal- and natural gas-fired electricity generating plants in the United States following state-level legislation that ended cost-of-service regulation among investor-owned electric utilities in the late 1990s. I construct a detailed dataset that links confidential, shipment-level data on the price of virtually all of the fuel delivered to coal- and gas-fired electricity plants in the United States from 1990-2009, with plant-level data on operations and regulatory status. Using a matched difference-in-difference estimation strategy to account for confounding shipping costs, I found the price of coal drops by 12% at deregulated plants relative to matched plants that were not subject to any regulatory change, whereas there was no relative drop in the price of gas. Deregulated plants disproportionately switch to burning low-sulfur coal rather than install capital-intensive abatement equipment to comply with environmental regulations, and expand imports from out of state by 25% if they were initially burning in-state coal. I show how these results lend support to theories of asymmetric information between generators and regulators, regulatory capture, and capital-bias as important sources of distortion under cost-of-service regulation. I then show that the drop in the price of coal is associated with a reallocation of purchases to more productive mines, rather than simply a transfer of regulatory rents from coal producers to electricity generators. Although only one quarter of U.S. coal-fired capacity has been deregulated, the end of cost-of-service regulation has reduced the price of fuel by about one billion dollars per year for these plants.

Marquis, Christopher, and Michael W Toffel. “When Do Firms Greenwash? Corporate Visibility, Civil Society Scrutiny, and Environmental Disclosure.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2012.Abstract

Under increased pressure to report environmental impacts, some firms selectively disclose relatively benign impacts, creating an impression of transparency while masking their true performance. What deters selective disclosure and leads firms to instead make disclosures more representative of their environmental performance? We hypothesize that selective disclosure, a novel symbolic strategy firms use to manage stakeholder perceptions, is mitigated by two forms of organizational visibility. Firms with greater domain-specific visibility have specific characteristics that make them especially vulnerable to stakeholder criticism and as a result are less prone to selective disclosure. In contrast, more generically-visible firms are deterred from selectively disclosing only when they are subjected to civil society scrutiny. We test our hypotheses using a novel panel dataset of 4,484 public companies in many industries, headquartered in 38 countries, during 2005-2008, when environmental disclosure increased among global corporations. We find that domain-specific visibility mitigates selective disclosure, that it mitigates selective disclosure more so than generic visibility, and that generic visibility mitigates selective disclosure only in the presence of civil society scrutiny. This research contributes to understanding how corporations manage the symbolic use of information and how corporate behavior is influenced by civil society scrutiny embedded in institutional processes.