HEEP Discussion Papers

Henderson, Rebecca, and Richard G Newell. “Accelerating Energy Innovation: Insights from Multiple Sectors.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010. dp25_henderson-newell.pdf
Jack, Kelsey B. “Allocation in environmental markets: A field experiment with tree planting contracts.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Behrer, Arnold Patrick. “Building in the Mountains: A hedonic analysis of the value of degraded mountain views using GIS modeling.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Stavins, Robert N, and Robert W Hahn. “The Effect of Allowance Allocations on Cap-and-Trade System Performance.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Cooper, Richard N. “Europe's Emissions Trading System.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010. dp19_cooper.pdf
Weitzman, Martin L. “GHG Targets as Insurance Against Catastrophic Climate Damages.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Glaeser, Edward L, Siqi Zheng, Rui Wang, and Matthew E Kahn. “The Greenness of China: Household Carbon Dioxide Emissions and Urban Development.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Goulder, Lawrence H, and Robert N Stavins. “Interactions between State and Federal Climate Change Policies.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Frankel, Jeffrey. “The Natural Resource Curse: A Survey.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

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.

Stavins, Robert N. “The Problem of the Commons: Still Unsettled After 100 Years.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

The problem of the commons is more important to our lives and thus more central to economics than a century ago when Katharine Coman led off the first issue of the American Economic Review. As the U.S. and other economies have grown, the carrying-capacity of the planet— in regard to natural resources and environmental quality — has become a greater concern, particularly for common-property and open-access resources. The focus of this article is on some important, unsettled problems of the commons. Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by openaccess. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality. A key contribution of economics has been the development of market-based approaches to environmental protection. These instruments are key to addressing the ultimate commons problem of the twenty-first century — global climate change.

Kremer, Michael, Amrita Ahuja, and Alex Peterson Zwane. “Providing Safe Water: Evidence from Randomized Evaluations.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

Each year, 1.6 million children die from diarrheal diseases; unsafe drinking water is a major cause. This paper reviews evidence from randomized trials on domestic water access and quality in developing countries, interpreting the results through a public economics framework. It argues that subsidies for water treatment are likely warranted, while more evidence is needed to assess the case for subsidizing programs to improve access to water. Multiple randomized trials show that water treatment can cost-effectively reduce reported diarrhea. However, many consumers have low willingness to pay for cleaner water, with less than 10% of households purchasing household water treatment under existing retail models. Provision of information on water quality can increase demand, but only modestly. Free point of collection water treatment systems designed to make water treatment convenient, salient, and public, combined with a local promoter, can generate take up of more than 60 percent. The projected cost is as low as \$20 per year of life saved, comparable to vaccines. In contrast, the limited existing evidence suggests many consumers are willing to pay for better access to water, but it does not yet demonstrate that this improves health. Randomized impact evaluations have also generated a number of methodological insights, suggesting that: at least in some contexts, merely surveying households can lead them to change their behavior; separately randomizing offer and transaction prices does not yield evidence of sunk cost effects; revealed preference measures of clean water valuation are much lower than contingent valuation estimates; and randomized evaluations can be used to estimate parameters for structural policy simulations.

Matheny, Andrew Philip. “Reducing the impact of price shocks in energy-intensive economies.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010. dp16_matheny.pdf
Kremer, Michael, Edward Miguel, Jessica Leino, and Alex Peterson Zwane. “Spring Cleaning: Rural Water Impacts, Valuation, and Property Rights Institutions.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

Using a randomized evaluation in Kenya, we measure health impacts of spring protection, an investment that improves source water quality. We also estimate households’ valuation of spring protection, and simulate the welfare impacts of alternatives to the current system of common property rights in water, which limits incentives for private investment. Spring infrastructure investments reduce fecal contamination by 66%, but household water quality improves less, due to recontamination. Child diarrhea falls by one quarter. Travel-cost based revealed preference estimates of households’ valuations are much smaller than both stated preference valuations and health planners’ valuations, and are consistent with models in which the demand for health is highly income elastic. We estimate that private property norms would generate little additional investment while imposing large static costs due to above marginal-cost pricing, private property would function better at higher income levels or under water scarcity, and alternative institutions could yield Pareto improvements.

Olmstead, Sheila M, and Robert N Stavins. “Three Key Elements of Post-2012 International Climate Policy Architecture.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2010.Abstract

We describe three essential elements of an effective post-2012 international global climate policy architecture: a means to ensure that key industrialized and developing nations are involved in differentiated but meaningful ways; an emphasis on an extended time path of targets; and inclusion of flexible market-based policy instruments to keep costs down and facilitate international equity. This architecture is consistent with fundamental aspects of the science, economics, and politics of global climate change; addresses specific shortcomings of the Kyoto Protocol; and builds upon the foundation of the United Nations Framework Convention on Climate Change.

Cooper, Richard N. “The Case for Charges on Greenhouse Gas Emissions.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009.Abstract

The proposal discussed in this paper is to levy a common charge on all emissions of greenhouse gases, worldwide. All countries would be covered in principle, but the proposal could be implemented with a much smaller number of countries, provided they covered most of the emissions. While all greenhouse gases should in principle be covered, this paper will address mainly carbon dioxide, quantitatively the most important greenhouse gas; extensions to other greenhouse gases could be made with little or (in the case of methane) much difficulty. The charge would be internationally adjusted from time to time, and each country would collect and keep the revenue it generated. This paper will discuss in turn the motivation for such a proposal, how it would be implemented, its likely economic effects, the relationship to energy security, the possibility of mixing an emission charge with other schemes to limit emissions, especially “cap-and-trade” schemes, and the negotiability of such an agreement.

Stavins, Robert N, and Sheila M Olmstead. “Comparing Price and Non-Price Approaches to Urban Water Conservation.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009.Abstract

Urban water conservation is typically achieved through prescriptive regulations, including the rationing of water for particular uses and requirements for the installation of particular technologies. A significant shift has occurred in pollution control regulations toward market-based policies in recent decades. We offer an analysis of the relative merits of marketbased and prescriptive approaches to water conservation, where prices have rarely been used to allocate scarce supplies. The analysis emphasizes the emerging theoretical and empirical evidence that using prices to manage water demand is more cost-effective than implementing non-price conservation programs, similar to results for pollution control in earlier decades. Price-based approaches may also compare favorably to prescriptive approaches in terms of monitoring and enforcement. Neither policy instrument has an inherent advantage over the other in terms of predictability and equity. As in any policy context, political considerations are also important.

Zeckhauser, Richard, and Cass R Sunstein. “Dreadful Possibilities, Neglected Probabilities.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009. dp3_zeckhauser-sunstein.pdf
Frankel, Jeffrey. “An Elaborated Proposal for Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009.Abstract

This paper offers a detailed plan to set quantitative national limits on emissions of greenhouse gases, building on the foundation of the Kyoto Protocol. It attempts to fill in the most serious gaps: the absence of targets extending as far as 2100, the absence of participation by the United States and developing countries, and the absence of reason to think that countries will abide by commitments. The plan elaborates on the idea of a framework of formulas that can assign quantitative limits across countries, one budget period at a time. Unlike other proposals for century-long paths of emission targets that are based purely on science (concentration goals) or economics (cost-benefit optimization), this plan is based partly on politics. Three political constraints are particularly important. (1) Developing countries are not asked to bear any cost in the early years. (2) Thereafter, they are not asked to make any sacrifice that is different in kind or degree than was made by those countries that went before them, with due allowance for differences in incomes. (3) No country will accept an ex ante target that costs it more than 1% of GDP in present value, or more than 5% of {GDP} in any single budget period, or will abide by it ex post. An announced target path that implies a future violation of these constraints will not be credible, and thus will not provide the necessary signals to firms today. Thus paper tries out specific values for the parameters in the formulas (parameters that govern the extent of progressivity and equity, and the speed with which latecomers must eventually catch up). The resulting target paths for emissions are run through the WITCH model. The outcome is reasonable, in terms of both carbon abatement and economic cost, even though the targets obey the political constraints.

Stavins, Robert N. “Environmental Economics.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009.Abstract

This article provides an overview of the economics of environmental policy, including the setting of goals and targets, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. Also reviewed are the means of environmental policy, that is, the choice of specific policy instruments, featuring an examination of potential criteria for assessing alternative instruments, with focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional command-and-control mechanisms and market-based instruments.

Frankel, Jeffrey. “Global Environmental Policy and Global Trade Policy.” Cambridge, Massachusetts, {USA}: Harvard Environmental Economics Program, 2009.Abstract

The global climate regime and the global trade policy regime are on a collision course. National efforts to reduce emissions of greenhouse gases (GHGs) instill among environmentalists fears of leakage and among businesspeople fears of lost competitiveness. Policy-makers respond to these fears. In 2008, legislative attempts in both Washington, DC, and Brussels to enact long-term targets for reduced emission of GHGs included provisions for possible penalties against imports from countries perceived as non-participating. Trade measures, if well designed, could in theory be WTO-compatible, in light of the precedent of the shrimp-turtle case, in particular. But the actual provisions emerging from the political process are likely to violate the rules of the WTO, which poses the scenario of a WTO panel rejecting a major country’s climate change legislation. That would be a nightmare for the supporters of the WTO and free trade as much as for the supporters of the Kyoto Protocol and environmental protection. The issue is just the latest and largest instance of fears among many environmentalists that the WTO is an obstacle to their goals in general. For many critics, the WTO is a symbol of globalization, which they fear. The first part of this paper discusses the broader issue of whether environmental goals in general are threatened by the global free trade system. The paper then focuses exclusively on the narrower question of trade measures in the effort to implement climate change policy and whether they are likely to be successful. It concludes with specific recommendations for how border measures could be designed so that they were more likely to be true to the goal of reducing leakage and yet consistent with the WTO.