Fowlie, Meredith; Reguant, Mar; Ryan, Stephen P.
We assess the long-run dynamic implications of market-based regulation of carbon dioxide emissions in the US Portland cement industry. We consider several alternative policy designs, including mechanisms that use production subsidies to partially offset compliance costs and border tax adjustments to penalize emissions associated with foreign imports. Our results highlight two general countervailing market distortions. First, following Buchanan (1969), reductions in product market surplus and allocative inefficiencies due to market power in the domestic cement market counteract the social benefits of carbon abatement. Second, tradeexposure to unregulated foreign competitors leads to emissions “leakage” which offsets domestic emissions reductions. Taken together,...
Barreca, Alan; Clay, Karen; Deschênes, Olivier; Greenstone, Michael; Shapiro, Joseph
Adaptation is the only strategy that is guaranteed to be part of the world's climate strategy. Using the most comprehensive set of data files ever compiled on mortality and its determinants over the course of the 20th century, this paper makes two primary discoveries. First, we find that the mortality effect of an extremely hot day declined by about 80% between 1900–1959 and 1960–2004. As a consequence, days with temperatures exceeding 90°F were responsible for about 600 premature fatalities annually in the 1960–2004 period, compared to the approximately 3,600 premature fatalities that would have occurred if the temperature-mortality relationship from...
Derivative markets are an important tool enabling non‐financial companies to reduce their risk and manage their financing. Effective regulation of these markets can lower companies hedging costs and help improve productivity. Ineffective regulation can raise costs and reduce productivity. In this testimony, I address what type of action is likely to be effective in reducing hedging costs at nonfinancial companies and what type of action is likely to be ineffective or counterproductive.
Currie, Janet; Davis, Lucas; Greenstone, Michael; Walker, Reed
A ubiquitous and largely unquestioned assumption in studies of housing markets is that there is perfect information about local amenities. This paper measures the housing market and health impacts of 1,600 openings and closings of industrial plants that emit toxic pollutants. We find that housing values within one mile decrease by 1.5 percent when plants open, and increase by 1.5 percent when plants close. This implies an aggregate loss in housing values per plant of about $1.5 million. While the housing value impacts are concentrated within 1/2 mile, we find statistically significant infant health impacts up to one mile away.
Greenstone, Michael; List, John A.; Syverson, Chad
The economic costs of environmental regulations have been widely debated since the U.S. began to restrict pollution emissions more than four decades ago. Using detailed production data from nearly 1.2 million plant observations drawn from the 1972–1993 Annual Survey of Manufactures, we estimate the effects of air quality regulations on manufacturing plants’ total factor productivity (TFP) levels. We find that among surviving polluting plants, stricter air quality regulations are associated with a roughly 2.6 percent decline in TFP. The regulations governing ozone have particularly large negative effects on productivity, though effects are also evident among particulates and sulfur dioxide emitters....
Schmalensee, Richard; Stavins, Robert N.
Two decades have passed Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies. First, by creating this system to reduce SO2 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...
Klier, Thomas; Linn, Joshua
France, Germany, and Sweden link vehicle taxes to the carbon dioxide (CO2) emissions rates of passenger vehicles. Based on new vehicle registration data from 2005–2010, a vehicle’s tax is negatively correlated with its registrations. The effect is somewhat stronger in France than in Germany and Sweden. Taking advantage of the theoretical equivalence between an emissions rate standard and a CO2-based emissions rate tax, we estimate the effect on manufacturers’ profits of reducing emissions rates. For France, a decrease of 5 grams of CO2 per kilometer reduces profits by 24 euros per vehicle. We find considerable heterogeneity across manufactures and countries.
Pindyck, Robert S.
I examine the risk/return tradeoff for environmental investments, and its implications for policy choice. Consider a policy to reduce carbon emissions. To what extent does the value of such a policy depend on the expected future damages from global warming versus uncertainty over those damages, i.e., on the expected benefits from the policy versus their riskiness? And to what extent should the policy objective be a reduction in the expected temperature increase versus a reduction in risk? Using a simple model of a stock externality (e.g., temperature) that evolves stochastically, I examine the “willingness to pay” (WTP) for alternative policies...
Pindyck, Robert S.
Climate policy poses a dilemma for environmental economists. The economic argument for stringent GHG abatement is far from clear. There is disagreement among both climate scientists and economists over the likelihood of alternative climate outcomes, over the nature and extent of the uncertainty over those outcomes, and over the framework that should be used to evaluate potential benefits from GHG abatement, including key policy parameters. I argue that the case for stringent abatement—if it can be made at all—cannot be based on the kinds of modeling exercises that have permeated the literature, but instead must be based on the possibility...
Hanna, Rema; Duflo, Esther; Greenstone, Michael
It is conventional wisdom that it is possible to reduce exposure to indoor air pollution, improve health outcomes, and decrease greenhouse gas emissions in the rural areas of developing countries through the adoption of improved cooking stoves. This belief is largely supported by observational field studies and engineering or laboratory experiments. However, we provide new evidence, from a randomized control trial conducted in rural Orissa, India (one of the poorest places in India), on the benefits of a commonly used improved stove that laboratory tests showed to reduce indoor air pollution and require less fuel. We track households for up...
Deschênes, Olivier; Greenstone, Michael; Shapiro, Joseph S.
Willingness to pay for air quality is a function of health and the costly defensive investments that contribute to health, but there is little research assessing the empirical importance of defensive investments. The setting for this paper is a large US emissions cap and trade market – the NOx Budget Trading Program (NBP) – that has greatly reduced NOx emissions since its initiation in 2003. Using rich quasi-experimental variation, we find that the reductions in NOx emissions decreased the number of summer days with high ozone levels by about 25%. The NBP also led to reductions in expenditures on prescription...
Knittel, Christopher; Smith, Aaron
Ethanol made from corn comprises 10% of US gasoline, up from 3% in 2003. This
dramatic increase was spurred by recent policy initiatives such as the Renewable Fuel
Standard and state-level blend mandates, and supported by direct subsidies such as the Volumetric Ethanol Excise Tax Credit. Some proponents of ethanol have argued that
ethanol production greatly lowers gasoline prices, with one industry group claiming it
reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011. The estimates have
been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack. These
estimates are based on a series of papers by Xiaodong Du and Dermot Hayes....
Mello, Antonio S.; Reilly, John E.
Recent financial reforms, such as the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation, encourage greater use of clearing and therefore increased margining of derivative trades. They also impose margining requirements on OTC derivative dealers. One question arising out of the debates over these reforms is, does a margin mandate increases the cost of hedging by non-financial corporations—the so-called end-users of derivatives? Our answer is, No. We show that a non-margined derivative is equivalent to a package of (i) a margined derivative, and (ii) a contingent line of credit. A margin mandate merely requires that this package...
Eckaus, Richard S.
Though the facts of global climate change are beyond doubt, there has been relatively limited information about its local consequences. Global climate models and their derivatives have provided often differing and unspecific indications. This paper demonstrates an effective approach for the determination of local and seasonal effects of global climate change using data for the United States. Examples are given for specific weather station sites and for sites across the U.S. in five longitudinal strips divided into four latitudinal strips. Mean temperature and precipitation data are subjected to thirty year moving averaging and linear time trend lines are estimated, for...
Weigt, Hannes; Delarue, Erik; Ellerman, Denny
The overlapping impact of the Emission Trading System (ETS) and renewable energy (RE)
deployment targets creates a classic case of interaction effects. Whereas the price interaction is widely
recognized and has been thoroughly discussed, the effect of an overlapping instrument on the
abatement attributable to an instrument has gained little attention. This paper estimates the actual
reduction in demand for European Union Allowances that has occurred due to RE deployment
focusing on the German electricity sector, for the five years 2006 through 2010. Based on a unit
commitment model we estimate that CO2 emissions from the electricity sector are reduced by 33 to 57
Mtons, or 10%...
Greenstone, Michael; Looney, Adam
Energy consumption is critical to economic growth and quality of life. America’s energy system,
however, is malfunctioning. The status quo is characterized by a tilted playing field, where
energy choices are based on the visible costs that appear on utility bills and at gas pumps. This
system masks the “external” costs arising from those energy choices, including shorter lives,
higher health care expenses, a changing climate, and weakened national security. As a result, we
pay unnecessarily high costs for energy. New “rules of the road” could level the energy playing
field. Drawing from our work for The Hamilton Project, this paper offers four principles for
Joskow, Paul L.; Parsons, John E.
This paper analyzes the impact of the Fukushima accident on the future of nuclear
power around the world. We begin with a discussion of the ‘but for’ baseline and the
much discussed ‘nuclear renaissance.’ Our pre-Fukushima benchmark for growth in
nuclear generation in the U.S. and other developed countries is much more modest than
many bullish forecasts of a big renaissance in new capacity may have suggested. For at
least the next decade in developed countries, it is composed primarily of life extensions
for many existing reactors, modest uprates of existing reactors as their licenses are
extended, and modest levels of new construction. The majority of forecasted...
Joskow, Paul L.
Knittel, Christopher R.
The United States consumed more petroleum-based liquid fuel per capita than any other OECD- high-income country- 30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles travelled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax...