A Better Calculus for Regulators: From Cost-Benefit Analysis to the Social Welfare Function

March 2017–Matthew D. Adler

The social welfare function (SWF) is a powerful tool that originates in theoretical welfare economics and has wide application in economic scholarship, for example in optimal tax theory and environmental economics. This paper provides a comprehensive introduction to the SWF framework. It then shows how that framework can be used as the basis for regulatory policy analysis and why it improves on cost-benefit analysis (CBA). Two types of SWFs are especially plausible: the utilitarian SWF, which sums individual well-being numbers, and the prioritarian SWF, which gives extra weight to the well-being of the worse off. Either one of these is an improvement over CBA, which uses a monetary metric to quantify well-being and is thereby distorted by the declining marginal utility of money. The paper employs a simulation model based on the U.S. population survival curve and income distribution to illustrate, in detail, how the two SWFs differ from CBA in selecting risk-regulation policies.

Cooking Up Change in the Himalayas: Experimental Evidence on Cookstove Promotion

September 2016—S.K. Pattanayak, M.A. Jeuland, J.J. Lewis, V. Bhojvaid, N. Brooks, A. Kar, L. Morrison, O. Patange, L. Lipinski, N. Ramanathan, I.H. Rehman, R. Thadani, F. Usmani, M. Vora, V. Ramanathan

Improved cookstoves can potentially deliver triple wins by improving household health, particularly for women cooks and their children, by preserving local forests and air quality, and by mitigating global climate change impacts. Despite these promises, cleaner cooking technologies have run into major translation challenges, and there is growing pessimism about the potential for their successful diffusion, dissemination and adoption in rural areas. We report on a 3 year study from the central Himalayan region of India that challenges this pessimism. Our study applied mixed methods that combined expert solicitation, focus groups, baseline surveys, and extensive piloting to define an experimental intervention. Household in the intervention arm (762 households selected randomly from a larger sample of 1,051 households) received a package of information, demonstration, financing, and one of three randomized rebate amounts, which were delivered conditional on use of a purchased stove. The control arm (289 households) received nothing. All treatment households were given a choice of two stoves – one electric coil stove, the other a natural draft rocket stove – that were similar in price. Follow-up measurements revealed that this multipronged demand promotion strategy led to 52% of treatment households purchasing an improved cook stoves (ICS) (compared to 0% purchase of these stoves among control households). Furthermore, sales were higher (a) for electric stoves than natural draft stoves, and (b) when higher rebates were offered. We also found that households in the treatment group reduced solid fuel consumption by 1-2 kg/day on average and lowered time spent collecting solid fuel by 10-30 minutes per day. Without including the emissions from electric stoves, the reduction in biomass fuel use translates into emissions savings that are worth $0.34 (with only Kyoto protocol pollutants) and $1.35 (accounting for black carbon, organic carbon, and carbon monoxide emissions) per household per month. Although these findings point to a high latent demand for ICS, this demand is unfortunately not matched by a robust supply chain, as evidenced by the complete lack of adoption of similar technologies in the control group. Nevertheless the study provides several valuable lessons and we conclude with some recommendations related to the challenges of scaling up sustained use of improved energy products in rural settings.

Priority for the Worst Off and the Social Cost of Carbon

August 2016Matthew Adler, David Anthoff, Valentina Bosetti, Greg Garner,Klaus Keller, and Nicolas Treich

The social cost of carbon (SCC) is a monetary measure of the harms from carbon emissions. Specifically, it is the reduction in current consumption that produces a loss in social welfare equivalent to that caused by the emission of a ton of CO2. The standard approach is to calculate the SCC using a discounted-utilitarian social welfare function (SWF)—one that simply adds up the well-being numbers (utilities) of individuals, as discounted by a weighting factor that decreases with time. The discounted-utilitarian SWF has been criticized both for ignoring the distribution of well-being and for including an arbitrary preference for earlier generations. Here, we use a prioritarian SWF, with no time-discount factor, to calculate the SCC in the integrated assessment model RICE. Prioritarianism is a well-developed concept in ethics and theoretical welfare economics, but has thus far been little used in climate scholarship. The core idea is to give greater weight to well-being changes affecting worse-off individuals. We find substantial differences between the discounted-utilitarian and non-discounted prioritarian SCC.

Intra-seasonal Behavior in Multispecies Catch Share Fisheries

April 2016—by Martin D. Smith, Frank Asche, Anna Birkenbach, Andreea Cojocaru, and Atle G. Guttormsen

Fishermen face multidimensional decisions: when to fish, what to target, and how much gear to deploy. Most bioeconomic models assume single-species fisheries with perfectly elastic demand and focus on inter-seasonal dynamics. In real-world fisheries, vessels hold quotas for multiple species with heterogeneous biological or market conditions that vary intra-seasonally. This paper generates predictions about within-season behavior in multispecies catch share fisheries, accounting for stock aggregations, effort constraints, and downward-sloping demand. Results show variation in harvest patterns, including season length, acceleration or delay of harvests, and sequencing of individual species harvests. Harvest patterns are consistent with those observed in Norwegian multispecies groundfish fisheries.

Early Days in the Certification of Logging Concessions: Estimating FSC’s Deforestation Impact in Peru and Cameroon

August 2015 – by Stephanie Panlasigui, Jimena Rico-Straffon, Jennifer Swenson, Colby J. Loucks, and Alexander Pfaff

Conservation agendas and development agendas often are viewed as contradictory and, in the past, one or the other drove most forest policy. Yet leading conservation policies such as protected areas (PAs) increasingly combine the two. Sustainable forest management pushes integration from a starting point of development. One of the most visible initiatives of this type is certification of logging concessions, such as by the Forest Stewardship Council (FSC), to reduce various impacts of logging. The cost of sustainable management may lead firms not to certify a given concession, yet the potential benefits could lead firms to voluntarily certify at least some concessions (firms might benefit from strategies that raise forest loss elsewhere). This empirical analyses of two countries, Peru and Cameroon, aids in understanding what happened at certified sites during the relatively early days of certifications. It controls for unobserved factors’ influences over space and time, without which impacts—sometimes perverse—are mistakenly attributed to FSC certification (FSCC). In Peru, no average FSCC deforestation impact is observed in the study area (almost all concessions). One region, Madre de Dios, has an average reduction of 0.07% per year. In Cameroon, a small average FSCC deforestation impact of 0.02% per year is observed in the study area (all concessions), though in four of five regions there is no statistically significant effect. As available data improve, more impact may be observed in some conditions.

Enhancing Energy Efficiency Reporting: Using Index Numbers to Report Corporate-Level Measures of Sustainability

July 2015 – by Gale Boyd and Jay S. Golden

A growing number of companies report changes in energy use or other measures of “sustainability” on an intensity basis. However, when the mix of products produced is changing, it is hard to tell if a change in intensity is due to efficiency or simply changes in the types of products they produce. This paper draws a parallel between the problem of corporate reporting of sustainability and the empirical application of index decomposition analysis (IDA) of trends in energy use and greenhouse gas emissions. Although a variety of index numbers have been proposed by this literature, this paper presents one, the Fisher index, as a good choice and leaves the application of other index numbers in the literature to the reader. An example using real world data from the seven divisions of a large, energy-intensive company, Corning, is presented.

Comparing the Statistical Distributions of Energy Efficiency in Manufacturing: Meta-Analysis of 24 Industry-Specific Case Studies

July 2015 – by Gale Boyd

Over the past several years, there has been growing interest among policy makers and others in the role that industrial energy efficiency can play in climate, air, and other potential regulatory actives. The U.S. Environmental Protection Agency has supported development of sector-specific industrial energy efficiency case studies using statistical analysis of plant-level data to assess the distribution of energy use, controlling for a variety of plant production characteristics. These case studies are the basis for the ENERGY STAR® Energy Performance Indicators (EPI). To date, there are EPI for 14 broad industries, two dozen sectors, and many more detailed product types. This paper is a meta-analysis of the approach used in this research and general findings regarding the range of performance within and across industries. Observations about industrial plant benchmarking and lessons are explored. It appears that few sectors are well represented by a simple “energy per widget” benchmark, that less energy-intensive sectors tend to exhibit a wider range of within-industry performance than energy intensive sectors, and that changes over time in the level and range of energy performance reveal no single pattern.

Comparing Emission Mitigation Effort

June 2015 – by Joseph E. Aldy, William A. Pizer, and Keigo Akimoto

A natural outcome of the emerging pledge and review approach to international climate change policy is interest in comparing mitigation effort among countries. Domestic publics and stakeholders will have an interest in knowing if peer countries are undertaking (or planning to undertake) comparable effort in mitigating their greenhouse gas emissions. Moreover, if considered inadequate to address the risks posed by climate change, the aggregate effort will likely prompt broader interest in identifying those countries where greater effort is arguably warranted on the basis of peer comparisons. Both assessments require metrics of effort and comparisons among countries. We propose a framework for such an exercise, drawing from a set of principles for designing and implementing informative metrics. We present a template for organizing metrics on mitigation effort, for both ex-ante and ex-post review. We also provide preliminary assessments of effort along emissions, price, and cost metrics for post–2020 climate policy contributions by China, the European Union, Russia, and the United States. We close with a discussion of the role of academics and civil society in promoting transparency and facilitating the evaluation and comparison of effort.

Do Decentralized Community Treatment Plants Provide Better Water? Evidence from Andhra Pradesh

April 2015 – by M. Jeuland, M. McClatchey, S.R. Patil, S.K. Pattanayak, C.M. Poulos, and J.C. Yang

Highly advanced, community-level drinking water treatment facilities are increasingly viewed as water supply solutions in locations where piped in-house water systems are nonexistent or unreliable. These systems utilize combined technologies, such as advanced filtration plus ultraviolet disinfection or reverse osmosis, which are known to be highly effective for the removal of pathogens and other water contaminants. Yet there is a paucity of rigorous evidence on whether the community-level treatment model delivers water quality, health, or other benefits to households that source water from them. This paper utilizes a quasi-experimental approach that combines construction of counterfactual groups of villages and households and a difference-in-difference methodology to examine such impacts. We find low rates of sourcing water from the facilities (~10%) and little evidence of benefits among households living in villages receiving a community water system (CWS). Particularly among users of the CWS, we also observe short-term increases in the number of drinking water sources used and in monthly expenses on drinking water combined with decreases in in-house water treatment as well as higher reported rates of diarrheal diseases among children. In the long term, as the CWS model spread throughout the region, most of the differences between households in treated communities and control communities fade. These findings suggest that caution and additional scrutiny are warranted before concluding that CWSs provide safer water to households in communities facing drinking water quality problems.

Do Differentiated Performance Standards Help Coal? CO2 Policy in the U.S. Electricity Sector

December 2014 – by David A. Bielen

The U.S. Environmental Protection Agency (EPA) is developing regulations for carbon dioxide (CO2) emissions from existing fossil fuel power plants. Due to the heavy carbon-intensity of coal as a fuel, the coal industry and related interests appear likely to bear much of the regulatory burden. In response, regulatory features aimed at mitigating some of the adverse impacts on coal and its constituents have been discussed, either in the interest of equity or as a means of easing political and legal opposition. This paper examines one approach motivated by the current EPA proposal: differentiation in the context of tradable performance standards, whereby the standard is relaxed for coal generation and tightened for natural gas generation. It explores the economic incentives induced by such a policy and evaluates three key distributional outcomes: aggregate coal usage, coal plant projects, and regional wholesale electricity prices.

Consumption, Risk and Prioritarianism

October 2014 – by Matthew D. Adler and Nicolas Treich

This paper examines consumption decisions under risk assuming a prioritarian social welfare function, namely, a concave transformation of individual utility functions. Under standard assumptions, there is always more current consumption under ex ante prioritarianism than under utilitarianism. Thus, a concern for equity (in the ex ante prioritarian sense) means less concern for the risky future. In contrast, there is usually less current consumption under ex post prioritarianism than under utilitarianism. The paper concludes with a discussion of the robustness of these results to learning and to other forms of prioritarian social welfare functions.

Preference Heterogeneity and Adoption of Environmental Health Improvements: Evidence from a Cookstove Promotion Experiment

September 2014 – by Marc Jeuland, Subhrendu K. Pattanayak, and Jie-Sheng Tan Soo

Household preferences should influence adoption of environmental health-improving technologies, but there has been limited empirical research to isolate their importance, perhaps due to challenges of measurement and attribution. This paper explores heterogeneity in household preferences for different features of improved cookstoves (ICS) and assesses the degree to which these preferences are associated with actual adoption of electric and biomass-burning cookstoves during a randomized stove promotion campaign in northern India. Latent class analysis of data from a discrete choice experiment conducted in baseline surveys of 1,060 households identified three preference types: disinterested (54%), low demand but primarily interested in reduced smoke emissions (27%), and high demand with interest in most features of the ICS (20%). The ICS intervention, which was stratified according to communities’ prior history of interactions with the NGO marketing the stoves, was then randomized to 762 of these households. The main findings are that households in the disinterested class are less likely to purchase an ICS, that preference class is more strongly related to stove purchase than common sociodemographic drivers of technology adoption identified in the literature, and that distaste for smoke emissions appears to be a particularly strong driver for adoption of an electric ICS.

Terminating Links between Emission Trading Programs

August 2014 – by William A. Pizer and Andrew J. Yates

Compliance links between CO2emission trading programs—where firms regulated under one region’s tradable permit program can comply using permits from another region, and vice versa—are beginning to arise as a vehicle to lower costs, increase liquidity, and strengthen institutions while achieving the same environmental outcome. These links are not immutable, raising the question of how to manage a delink and, in particular, what to do with existing permits that are banked for future use—choices that can have important consequences for market behavior in advance of, or upon speculation about, a delinking event. This paper considers two delinking policies. One differentiates banked permits by origin, where banked permits originating in one region are only valid for compliance in that region after the delink occurs. The other treats all banked permits the same: each banked permit is split into two pieces, with one piece valid in one region and the other piece valid in the other region. Using a two-region, two-period model, the paper describes the price behavior and relative cost-effectiveness of each policy. Treating permits differently generally leads to higher costs, and may lead regional prices to diverge, even when there is only speculation about delinking. The paper illustrates these results with a numerical example of the EU-Australian link contemplated in 2013.

Bundles, Duties, and Rights: A Revised Framework for Analysis of Natural Resource Property Rights Regimes

August 2014 – by Christopher S. Galik and Pamela Jagger

In their 1992 paper, Schlager and Ostrom presented a property rights framework characterized by nested, cumulative attributes. It has become arguably the most ubiquitous framework for analysis of natural resources and property rights. This paper revisits their contribution and discusses how the framework could evolve to address increasingly complex situations, with particular attention to institutional change. It devotes attention to duties and liabilities associated with right allocation, tying the framework to a broader property rights literature. It concludes with an application to reducing emissions from deforestation and forest degradation (REDD+), illustrating how revisions to the framework facilitate contemporary institutional analysis.

Preferences for Improved Cook Stoves: Evidence from North Indian Villages

July 2014 – by M.A. Jeuland, V. Bhojvaid, A. Kar, J.J. Lewis, O. Patange, S.K. Pattanayak, N. Ramanathan, I.H. Rehman, J.S. Tan Soo, and V. Ramanathan

Because emissions from solid fuel burning in traditional stoves affect global climate change, the regional environment, and household health, there is a real fascination with improved cook stoves (ICS). Surprisingly little is known about what households like about these energy products. This paper reports on preferences for ICS attributes in a sample of 2,120 rural households in north India, a global hotspot for biomass fuel use. Households have a strong preference for traditional stoves but on average are willing to pay (WTP) about $10 and $5 for realistic reductions in smoke emissions and fuel needs, respectively, or about half of the price of less expensive ICS. Still, preferences for stove attributes are highly varied and are related to household characteristics (e.g., expenditures, gender of household head, patience, and risk preferences). These results suggest that households exhibit cautious interest in the promise of ICS but that significant barriers to achieving widespread adoption remain. Therefore the policy community must reinvigorate a supply chain that (a) experiments with product attributes and (b) segments the market based on consumer education, wealth, and location in order to scale up ICS distribution and deliver household and global benefits.

Heterogeneous Effects of Information on Household Behaviors to Improve Water Quality

July 2014 – by Joe Brown, Amar Hamoudi, Marc Jeuland, and Gina Turrini

Providing information about health risks only sometimes induces protective action, raising questions about whether and how risk information is understood and acted on and about how responses vary across contexts. This analysis stratified a randomized experiment across two periurban areas in Cambodia, which differed in terms of socioeconomic status and infrastructure. In one area, showing households specific evidence of water contamination altered their beliefs about health risk and increased their demand for a treatment product; in the other area, it had no effect on these outcomes. These findings highlight the importance of identifying specific drivers of responses to health risk information.

Assessing the Value of Marine and Coastal Ecosystem Services in the Sargasso Sea

July 2014 – by L. Pendleton, F. Krowicki, P. Strosser, and J. Hallett-Murdoch

The Sargasso Sea is both ecologically and economically important. However, quantifying the exact economic contribution of areas of the high seas, like the Sargasso Sea, remains a challenge because of the absence of fluid and official boundaries for these ecosystems and the fact that they are remote from most human settlements. This paper examines the economic value of selected commercially important activities that depend directly on ecosystem health in the Sargasso Sea–an area of the open ocean situated within the North Atlantic Subtropical Gyre that is largely high seas. It finds that the economic values directly or potentially linked to the Sargasso Sea are on the order of several tens to hundreds of millions of dollars per year.

Decentralized Management Hinders Coastal Climate Adaptation: The Spatial Dynamics of Beach Nourishment

June 2014 – by Sathya Gopalakrishnan, Dylan McNamara, Martin D. Smith, and A. Brad Murray

This analysis is part of a growing literature on the spatial-dynamics of renewable resources. It models the behavior of two adjacent communities adapting to shoreline change and finds that long-run beach width and therefore property values are lower in both communities under status quo decentralized management than they would be under spatially coordinated management. Because of spatial-dynamic feedbacks in the coastal zone, decentralized management fails to achieve the coordinated social optimum. Intensifying erosion—consistent with accelerating sea level rise—exacerbates the problem and increases losses from failure to coordinate. Despite larger efficiency gains from coordination, higher erosion increases inequality in the distribution of benefits across communities under spatially coordinated management. This disincentive to coordinate suggests the need for higher-level government intervention to address what has been viewed traditionally as a local problem. A policy that subsidizes local nourishment in a spatially targeted manner can achieve welfare-maximizing outcomes by removing incentives to free ride on neighboring communities.

Spillovers in Regional Fisheries Management: Do Catch Shares Cause Leakage?

June 2014 – by Sam Cunningham, Lori S. Bennear, and Martin D. Smith

U.S. fisheries are managed by regional councils, and fishermen can participate in fisheries managed by multiple councils. Effort controls in one region could lead to effort leakage into another. Using difference-in-differences, the authors test for leakage across regional fisheries boundaries for a catch share program in New England. They find evidence that the New England groundfish sector program caused leakage into adjacent Mid-Atlantic fisheries. Aggregate mid-Atlantic harvest volume and landed values increased among sector members after the policy change. Leakage is most acute in fisheries with low institutional barriers, similar gear, and high market substitutability with sector species.

Geoengineering Coastlines? From Accidental to Intentional

June 2014 – by Martin D. Smith, A. Brad Murray, Sathya Gopalakrishnan, Andrew G. Keeler, Craig E. Landry, Dylan McNamara, and Laura J. Moore

On developed coastlines, humans react to physical processes in coastal environments by stabilizing shorelines against chronic erosion and by taking measures to prevent destruction of coastal infrastructure during storms. Over decades or longer, even localized anthropogenic shoreline manipulations influence large-scale patterns of coastline change as much as physical, climate-related forcing does. The long-range spatial and temporal spillovers of localized human actions in coastal environments, combined with widespread localized shoreline-stabilization and storm protection efforts, amount to an unintentional geo-engineering of our coastlines. In essence, investments in coastal engineering fail to consider tradeoffs that can unfold over long temporal or large spatial scales. A more purposeful geo-engineering of coastlines requires a richer understanding of the two-way couplings between physical and human coastline dynamics, including efforts to reduce uncertainties in forecasting future scenarios for the coupled system. Steering toward preferred outcomes for our coastlines and coastal economies will involve coordination across local, state, and federal jurisdictions to mitigate spatial externalities that extend beyond local communities.

Why Have Greenhouse Emissions in RGGI States Declined? An Econometric Attribution to Economic, Energy Market, and Policy Factors

May 2014- by Brian C. Murray, Peter T. Maniloff, and Evan M. Murray

The Regional Greenhouse Gas Initiative (RGGI) is a consortium of northeastern U.S. states that limit carbon dioxide emissions from electricity generation through a regional emissions trading program. Since RGGI started in 2009, regional emissions have sharply dropped. We use econometric models to quantify the emissions reductions due to RGGI and those due to other factors such as the recession, complementary environmental programs, and lowered natural gas prices. The analysis shows that RGGI has induced greater emissions reductions within the region than have been achieved proportionally in the rest of the United States, though some extramural leakage may have occurred.

Equating Permanence of Emission Reductions and Carbon Sequestration: Scientific and Economic Foundations for Policy Options

December 2013 – by Brian C. Murray and Prasad S. Kasibhatia

Terrestrial (biological) carbon sequestration is the process by which carbon dioxide (CO2) is removed from the atmosphere through photosynthesis and stored in terrestrial stocks of biomass or soil organic carbon. A ton of carbon (or CO2 equivalent) sequestered in terrestrial systems can be used as an offset credit against emissions from sources such as power plants, factories, or automobiles. However, carbon stored in terrestrial carbon pools is particularly susceptible to re-release (reversal), raising the so-called permanence issue. When a reversal occurs, crediting adjustments are necessary to restore the integrity of the offset mechanism. This paper explores the permanence issue from both an atmospheric and an economic perspective, showing that adjustments for reversals can depend on a variety of factors, including the assumed decay rate of the initial emissions pulse, the timing of any stored carbon release, a policy-determined “equivalency period” reflecting the relevant policy time horizon, the time-dependent economic value of carbon mitigation units, and the relevant discount rate for comparing economic flows over time.

Behavioral Spillovers from Targeted Incentives: Losses from Excluded Individuals Can Counter Gains from Those Selected

October 2013 – by Francisco Alpízar, Anna Nordén, Alexander Pfaff, and Juan Robalino

Incentives conditioned on socially desired acts such as donating blood, departing conflict, or mitigating climate change have increased in popularity. Many incentives are targeted, excluding some of the potential participants on the basis of characteristics or prior actions. We hypothesize that pro-sociality is reduced by exclusion, in of itself (i.e., fixing prices and income) and that the rationale for exclusion influences such “behavioral spillovers.” To test this hypothesis, we use a laboratory experiment to study the effects of a subsidy for donations when participants are fully informed about why they are, or are not, selected for the subsidy. We study the effects of introducing different selection rules on changes in donations. Selecting for the subsidy those who initially acted less pro-social (i.e., those who gave little to start) increased donations, whereas providing random subsidies and rewarding greater pro-sociality did not increase donations. Yet a selection rule that targets lower prior pro-sociality also intentional excludes the people who donated more initially, and only that rule reduced donations by the excluded participants. This finding shows a tradeoff between losses from excluded participants and gains from selected participants.

Effects of Exclusion from a Conservation Policy: Negative Behavioral Spillovers from Targeted Incentives

October 2013 – by Francisco Alpízar, Anna Nordén, Alexander Pfaff, and Juan Robalino

A critical issue in the design of incentive mechanisms is the choice of whom to target. For forests, the leading rules are (1) target locations with high ecosystem-service density; (2) target additionality, i.e., locations where conservation would not occur without the incentive; and, (3) at least effectively reward previous private choices to conserve forest. We use a field experiment to examine the changes in contributions to forest conservation when we introduce each of these selection rules. For individuals who are selected, we find that targeting additionality (rule 2) is the only scheme to increase contributions. However, that selection rule intentionally excludes those who contributed most previously, and it is the only one to generate significant “behavioral leakage,” i.e., negative spillovers or a decrease in contributions by those who are excluded (and who face no price or income changes). Our results demonstrate a tradeoff in targeting and a challenge for optimal policy design.

Designing Cap and Trade to Correct for Non-Additional Offsets

September 2013-by Brian C. Murray, Jonah M. Busch, Richard T. Woodward, and W. Aaron Jenkins

Offsets lower the cost of cap-and-trade programs but must be considered imperfect if they cannot exclude “non-additional” emissions reductions or sequestration gains that would have occurred in their absence. Non-additionality can be addressed by requiring project-level additionality tests, by adjusting the mandatory emissions cap, or by imposing a trading ratio requirement on offset credits. Additionality tests most completely put the welfare impact on non-additional abaters but are challenging to implement. A cap adjustment is simple but places the entire welfare impact on the capped sector. A trading ratio, also simple, spreads the welfare impact across the capped and uncapped sectors. A trading ratio may either increase or decrease the welfare of the uncapped sector. When the quantity of non-additional abatement is uncertain, a cap adjustment has lower aggregate costs than a trading ratio, whereas a trading ratio has less variance with respect to quantity of emissions reduced.

Cost-Benefit Analysis and Distributional Weights: An Overview

August 2013-by Matt Adler

Cost-benefit analysis (CBA) is notoriously insensitive to distributional concerns, favoring a policy with a positive sum of monetary equivalents, even if better-off individuals are benefitted at the expense of worse-off ones. This problem is sometimes mitigated, in practice, by monetizing goods and bads using constant values that do not vary with individuals’ attributes. However, the use of population-average or otherwise constant values lacks any theoretical basis. Moreover, this practice can have unpleasant implications, for example, forcing people to spend more money on risk reduction than they would prefer. Arguably, equity considerations should be incorporated into CBA through so-called distributional weights. Specifically, CBA with distributional weights is a practicable method for operationalizing a social welfare function (SWF). Two SWFs and the functional form of weights matching them are discussed, and an example of how distributional weights might be brought to bear on environmental policy choice is given. Various objections to distributional weights are also discussed—including the traditional objection that redistribution is best handled through the tax system.

Nudging Energy Efficiency Behavior: Role of Information Labels

August 2013-by Richard Newell and Juha V. Siikamaki

This report evaluates the effectiveness of energy efficiency labels in guiding household decisions. Using a choice experiment with alternative labels, the authors find that simple information on the economic value of saving energy is the most important element guiding more cost-efficient investments in appliance energy efficiency; information on physical energy use and carbon emissions has no significant additional value. They also find that the degree to which the current EnergyGuide label guides cost-efficient decisions depends on the assumed discount rate. These results reinforce the importance of intertemporal choice and discounting for understanding individual behavior and guiding policy.

Pricing of Eco-Labels for Salmon in UK Supermarkets

May 2013 – by Frank Asche, Thomas A. Larsen, Martin D. Smith, Geir Sogn-Grundvag and James A. Young

Eco-labels are important features of many natural resource and food markets. They certify that a product has a desirable intrinsic quality, typically related to a public good such as being sustainably produced. In an increasing number of markets, consumers can choose between different labels that certify different attributes. Two issues that have received limited attention are whether pricing varies across different eco-labels and to what extent different retailers have adopted different pricing strategies for eco-labels. This paper investigates these issues by estimating a hedonic price model for salmon sold in Glasgow, U.K. for eight different retail chains, two eco-labels, and one label of origin. The results show substantial variation in the prices of the different eco-labels and that eco-label premiums vary across retail chains.

Carbon Markets: Past, Present and Future

January 2013 – by Richard G. Newell, William A. Pizer, and Daniel Raimi

Carbon markets are substantial and they are expanding. There are many lessons from experiences over the past eight years: fewer free allowances, better management of market-sensitive information, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets and relative to a variety of other policy approaches.

Analyzing Economic Tradeoffs of Water Use in the Nam Ngum River Basin, Lao PDR

December 2012 – by Ryan Bartlett, Justin Baker, Guillaume Lacombe, Somphasith Douangsavanh, and Marc Jeuland

This paper develops a hydroeconomic optimization modeling framework to assess the economic consequences and potential trade-offs of various infrastructure development and policy pathways in the Nam Ngum Basin (Lao PDR). We considered whether large shifts in water resource demands in a relatively water abundant basin could induce meaningful economic tradeoffs among water uses, including hydropower generation, irrigation expansion, flood control, and transboundary water transfer objectives. We constructed a series of sensitivity scenarios under dry, average, and wet hydrologic conditions with varying levels dam development, irrigated agricultural expansion, agricultural returns, flood control storage restrictions, and water diversions to northeast Thailand. We also considered how flows into the Mekong would be affected by these collective developments. In general, results indicate that tradeoffs between hydropower production, irrigation, and flood control are modest.

Mobilizing the Private Sector Quantity-Performance Instruments for Public Climate Funds

September 2012 – by Arunabha Ghosh, Benito Müller, William Pizer, and Gernot Wagner

In recent years, public sector funding, in general, and for the support of activities in developing countries, in particular, has become more and more “results” and “performance” oriented. There are different methods by which performance can be “indicated” (or even “measured”). The focus of this brief is on activities that are associated with quantitative performance indicators, i.e., performance assessed in terms of measured quantities—such as tonnes (of carbon), kilowatt-hours, or hectares—as carried out by the private sector. The aim of this brief is to review options for the use of such Quantity-Performance (QP) instruments as a way of channeling public funds to mitigate greenhouse gas emissions in a cost-effective way. QP instruments reward quantified mitigation performance, typically measured in tonnes of carbon dioxide-equivalent of achieved emissions reductions. As such, they imply exactly the kind of results monitoring that the current trend in public funding demands. They could be used by governments or multilateral funds, such as the Green Climate Fund, to mobilize the private sector and private sector finance for mitigation activities in developing countries.

Estimating the Impacts of Brownfield Remediation on Housing Property Values

August 2012 – by Kevin Haninger, Lala Ma, and Christopher Timmins

The U.S. Environmental Protection Agency Brownfields Program provides grants to assess and clean up brownfields—properties the “expansion, re-development, or re-use of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.” The highly localized nature of brownfields lends itself well to measuring the value of site remediation with property value hedonics. The application of that technique is, however, complicated by the presence of correlated unobservable determinants of housing prices (both time-invariant and those that vary over time). This report uses a variety of quasi-experimental techniques to overcome this problem. The analysis finds evidence of large increases in property values accompanying cleanup, ranging from 5.1% to 12.8%; a double-difference matching estimator that does not rely on the intertemporal stability of the hedonic price function finds even larger effects, implying that evidence of property value increases is consistent with a willingness to pay interpretation.

Measuring Improvement in the Energy Performance of the U.S. Corn Refining Industry

July 2012 – by Gale A. Boyd and Christian Delgado

Benchmarking is an important component of energy management, enabling goal setting and prioritizing of resources. This paper discusses the development of a statistical benchmark of energy intensity for the wet corn refining industry using stochastic frontier analysis and confidential plant data. This analysis is the basis for developing the Energy Performance Indicator for the U.S. EPA Energy Star program, providing a tool to score the energy performance of the industry on a percentile basis, accounting for differences in product mix and moisture. A similar analysis was previously conducted for this industry using data from 1997, so the paper also compares the results from the current and previous models to assess the shift in performance of this industry. We estimate a reduction of 6.7 trillion Btu in annual energy use in 2009 relative to the levels of performance in 1997. This represents about a 4.3% reduction in overall energy use and 470 million kg of energy-related CO2 equivalent emissions from improved energy efficiency by this industry.

Flexible Mandates for Investment in New Technology

March 2012 – by Dalia Patino Echeverri, Dallas Burtraw, and Karen Palmer

Regulators often seek to promote the use of improved, cleaner technology when new investments occur; however, technology mandates are suspected of raising costs and delaying investment. We examine investment choices for electricity generation under a strict emissions rate performance standard requiring the installation of carbon capture and storage (CCS) on fossil-fired plants. We compare the strict standard with a flexible one that imposes a surcharge for emissions in excess of the standard. A third policy allows the surcharge revenue to fund later CCS retrofits. Analytical results indicate that increasing flexibility leads to earlier introduction of CCS, lower aggregate emissions and higher profits. We test this using multi-stage stochastic optimization, with uncertain future natural gas and emissions allowance prices. Under perfect foresight, the analytical predictions hold. With uncertainty, these predictions hold most often but we find outcomes that contradict the theory. In some cases, investments are delayed to enable the decision maker to learn additional information.

Price versus Quantities versus Bankable Quantities

March 2012 – by Harrison Fell, Ian A. MacKenzie, and William A. Pizer

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalance in existing and proposed emission-trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm’s perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.

Does Cleanup of Hazardous Waste Sites Raise Housing Values? Evidence of Spatially Localized Benefits

February 2012 – by Shanti Gamper-Rabindran and Christopher Timmins

Economists often rely on publicly available data provided at coarse geographical resolution to value spatially localized amenities. We propose a simple refinement to the hedonic method that accommodates this reality: specifically, we measure localized benefits from the cleanup of hazardous waste sites at the sub-census tract level by examining the entire within-tract housing value distribution, rather than simply focusing on the tract median. Doing so, we find significantly larger benefits from being listed on the Superfund’s National Priorities List (NPL) at lower percentiles. We find that the NPL’s “construction complete” and “deletion” designations have large effects across the housing value distribution, although these effects are also larger at lower percentiles. We confirm these results with restricted access census block data, and use proprietary housing transactions data to show that cheaper houses within a census tract are indeed more likely to be closer to a hazardous waste site, explaining the greater impacts they receive from the cleanup process.

Facing the Climate Change Challenge in a Global Economy

January 2012 – by Lee Branstetter and William A. Pizer

Over the past two decades, the international community has struggled to deal constructively with the problem of mitigating climate change. This is considered by many to be the preeminent public policy challenge of our time, but real progress has been disappointingly slow. This essay provides an abbreviated narrative history of international policy in this domain, with a special emphasis on aspects of the problem, proposed solutions, and unresolved issues that are of interest to international economists and informed observers of the global economic system. It discusses the potential conflict that could emerge between free trade principles and environmental policy imperatives.

The Competitiveness Impacts of Climate Change Mitigation Policies

January 2012 – by Joseph E. Aldy and William A. Pizer

The pollution haven hypothesis suggests that unilateral domestic emission mitigation policies could cause adverse “competitiveness” impacts on domestic manufacturers as they lose market share to foreign competitors and relocate production activity–and emissions–to unregulated economies. We construct a precise definition of competitiveness impacts appropriate for climate change regulation that can be estimated exclusively with domestic production and net import data. We use this definition and a 20-plus-year panel of more than 400 U.S. manufacturing industries to estimate the effects of energy prices, which is in turn used to simulate the impacts of carbon pricing policy. We find that a U.S.-only $15-per-ton CO2 price will cause competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among the most energy-intensive manufacturing industries. This amounts to roughly one-third of the total impact of a carbon pricing policy on these firms’ economic output.

Designing Cap and Trade to Correct for “Imperfect” Offsets

January 2012 – by Brian C. Murray, W. Aaron Jenkins, Jonah M. Busch, and Richard T. Woodward

The use of offsets can potentially improve a cap-and-trade system by lowering the overall cost of compliance, encourage mitigation from outside of the cap, and function as a bridge strategy, giving the regulated sectors time to innovate new low-carbon technologies and business plans. But offset provisions can be imperfect, and decision makers must appreciate the implications of these flaws and design the national offset program accordingly. This paper discusses three policy options for addressing offset integrity issues that can cause effective aggregate abatement to fall below the optimum level set by a compliance cap, and assesses the efficiency and welfare implications—for offset buyers and suppliers—of these policy options.

Getting REDDy Understanding and Improving Domestic Policy Impacts on Forest Loss

December 2011 – by Alexander Pfaff, Gregory S. Amacher, and Erin O. Sills

Many constraints upon REDD+ policies’ ability to reduce forest loss are common across settings, inherent in the fact that agents making key choices respond also to other factors that influence the overall incentive to clear or to degrade a forest instead of conserving it. The record is mixed, at best, with regard to past public interventions to reduce forest loss, signaling the need to disseminate and to improve conceptual models of policy responses. We summarize three distinct models employed by economists to assess policy effectiveness: (1) producer profit maximization in choosing spatial extent and distribution of land uses, given complete markets; (2) rural household optimization given both incomplete markets and varied household assets and tastes; and (3) public optimization within interconnected choices about concessions, corruption, and decentralization, all important for degradation (‘D+’ in REDD+). Each model’s perspective on impact leads to a review of the evidence. We consider the impacts of forest-conservation and forest-relevant development policies for the settings, decisions, and scales for which each of the models best applies. Theory and evidence suggest options to increase the impacts of domestic REDD policies.

Beyond Belts and Suspenders Promoting Private Risk Management in Offshore Drilling

December 2011 – by Lori S. Bennear

This paper critically examines existing policies for regulating offshore drilling. It argues that historical regulations based on requiring significant redundancy in safety systems—“belts and suspenders”—is ineffective because the risks of safety system failures are not independent. New regulations require detailed safety and environmental planning and can be broadly classified as management-based regulations (MBR). The paper evaluates the theory of management-based regulations as it applies to offshore drilling and presents the existing evidence on MBR effectiveness. The results indicate that MBR is theoretically well suited to regulate offshore drilling, but there is limited empirical evidence of the effectiveness of MBR in regulating low-probability, high-consequence events. The paper ends with a proposal for an alternative regulation called a deposit-discount-refund system that is designed to better promote private risk management by creating incentives for both the creation and implementation of risk management plans.

Participation Incentives, Rebound Effects and the Cost- Effectiveness of Rebates for Water-Efficient Appliances

December 2011 – by Lori S. Bennear, Jonathan M. Lee, and Laura O. Taylor

Rebate programs for retrofitting residential properties with water-efficient appliances have become a common conservation policy tool for local municipalities. Engineering estimates of water savings from rebate programs can be systematically biased because they assume all subsidized appliance replacements would not have occurred in the absence of the subsidy and because they fail to account for potential rebound effects. Using a unique database that combines water use data over a three-year period for all households that participated in the utility’s high efficiency toilet (HET) rebate program, water use data for a matched sample of neighbors, and a survey of rebate participants, this paper evaluates whether rebates are a cost-effective means for water utilities to promote water conservation, accounting for both selection and rebound effects.

U.S. Shrimp Market Integration

October 2011 – by Frank Asche, Lori S. Bennear, Atle Oglend, and Martin D. Smith

Recent supply shocks in the Gulf of Mexico—including hurricanes, the Deepwater Horizon oil spill, and the seasonal appearance of a large dead zone of low-oxygen water (hypoxia)—have raised concerns about the economic viability of the U.S. shrimp fishery. The ability for U.S. shrimpers to mediate supply shocks through increased prices hinges on the degree of market integration, both among shrimp of different sizes classes and between U.S. wild caught shrimp and imported farmed shrimp. We use detailed data on shrimp prices by size class and import prices to conduct a co-integration analysis of market integration in the shrimp industry. We find significant evidence of market integration, suggesting that the law of one price holds for this industry. Hence, in the face of a supply shocks, prices do not rise and instead imports of foreign farmed fish increase.

Measuring Welfare Losses from Hypoxia: The Case of North Carolina Brown Shrimp

October 2011 – by Ling Huang, Lauren A.B. Nichols, J. Kevin Craig, and Martin D. Smith

While environmental stressors such as hypoxia (low dissolved oxygen) are perceived as a threat to the productivity of coastal ecosystems, policy makers have little information about the economic consequences for fisheries. Recent work on hypoxia develops a bioeconomic model to harness microdata and quantify the effects of hypoxia on North Carolina’s brown shrimp fishery. This work finds that hypoxia is responsible for a 12.9 percent decrease in North Carolina brown shrimp catches from 1999 to 2005 in the Neuse River Estuary and Pamlico Sound, assuming that vessels do not react to changes in abundance. The current paper extends this work to explore the full economic consequences of hypoxia on the supply and demand for brown shrimp. Demand analysis reveals that the NC shrimp industry is too small to influence prices, which are driven entirely by imports and other domestic U.S. harvest. Thus, demand is flat and there are no measurable benefits to shrimp consumers from reduced hypoxia. On the supply side, we find that the shrimp fleet responds to variation in price, abundance, and weather. Hence, the supply curve has some elasticity. Producer benefits of reduced hypoxia are less than a quarter of the computed gains from assuming no behavioral adjustment.

Prices and Quantities to Control Overfishing

July 2011 – by Martin D. Smith and Sathya Gopalakrishnan

Economists have long promoted fishery rationalization programs, but individual transferable quotas (ITQs) may fail to address the ecological consequences of fishing. Of particular concern is that economic incentives to harvest larger fish (due to size-dependent pricing or quota-induced discarding) can destabilize fish populations or lead to evolutionary changes. A substantial theoretical literature in economics has explored incentive problems in ITQ fisheries but has treated highgrading as part of the stock externality. We provide an alternative viewpoint in that the stock externality and the size-based incentives are two distinct externalities and thus require two distinct policy instruments. In this paper, we show that if managers know the price-by-size distribution and the size distribution of the population, total revenues and total catch (in weight) by vessel are sufficient statistics to design a schedule of revenue-neutral individualized landings taxes that eliminate the incentive to highgrade in an ITQ fishery. Landings taxes can be used to address the ecological consequences of fishing while using ITQs to address the open access stock externality.

Incorporating Evaluation into the Regulatory Process

July 2011 – by Lori S. Bennear and Katherine Dickinson

For the last two decades substantial attention and resources have been devoted to increasing evaluation of government programs in an effort to promote evidenced-based and performance-based policies. However, federal efforts to promote evaluation through the Government Performance and Results Act and the Performance Assessment Rating Tool have had limited success. This paper seeks to evaluate the recent efforts at evaluation and provide guidance for how future efforts can be shaped. It provides a stylized model for evaluation in the regulatory process that is consistent with prior federal initiatives. It then examines four categories of barriers to implementation of this stylized model—cognitive, social/cultural, organizational, and incentive—and presents suggestions for how future evaluation efforts can be formulated to better overcome these barriers.

Measuring Improvement in the Energy Performance of the U.S. Cement Industry

May 2011 – by Gale Boyd and Gang Zhang

Recognizing the potential of energy efficiency to reduce CO2 emissions, the U.S. Environmental Protection Agency launched ENERGY STAR for Industry to educate manufacturers on steps to improve their energy efficiency. Energy management strategy is a key component of the ENERGY STAR approach. This paper focuses primarily on development of an updated ENERGY STAR industrial Energy Performance Indicator (EPI) for the Cement industry and the change in the energy performance of the industry observed when the benchmarking system was updated from the original benchmark year of 1997 to the new benchmark of 2008.

Success or Selection? An Economic Perspective on Fisheries Co-Management

April 2011 – by Lori S. Bennear and Martin D. Smith

This paper comments on a recent paper published in the journal Nature that claims that fisheries co-management causes successful outcomes in fisheries. We outline theoretical arguments in favor of and against co-management as an approach to solving fisheries-commons problems. We argue that the principal claims of the authors are not supported by their data and analysis. Spurious inference about effectiveness of co-management runs the risk of undermining rather than advancing the policy process.

Preliminary Analysis of the Distributions of Carbon and Energy Intensity for 27 Energy Intensive Trade Exposed Industrial Sectors

April 2011 – by Gale Boyd, Tatyana Kuzmenko, Béla Személy, and Gang Zhang

It is well documented that different manufacturing sectors require different amounts of energy. Primary materials conversion, e.g., iron ore and scrap into steel, limestone and sand into cement and glass, or wood and other fibers into paper, tend to be the most energy-intensive in the production process, while final consumer products like electronics and clothing require the least energy. This leads to something like the 80-20 rule, where a large portion of energy use is in a small number of industries. For example, the 2006 Manufacturing Energy Consumption Survey (MECS) reported that 75 percent of fuel use arises from only five of the 21 three-digit industries, using the North American Industry Classification System (NAICS). These five sectors are a small share of the total U.S. economy. The energy intensity for different industrial sectors is easily measured using published government statistics, but the plants within these industries are not homogeneous entities. This report measures the differences in energy use and associated CO2 emissions as a first step to understanding the within-sector heterogeneity of energy use.

Efficiency Gains from Pre-Investment Resource Queues: Coordinating Investment under Resource Uncertainty

April 2011 – by Miguel A. Fonseca, Alexander Pfaff, and Daniel Osgood

Farmers make investments before knowing how much water they will receive later in the season. The costs of the inefficiently high or low investment that may result can be significant. A spot market that efficiently allocates water once quantity is realized is unlikely to coordinate simultaneous efficient investments earlier in the season. This paper compares pre-established queues to a post-investment-and-resource-realization market in coordinating investment whose productivity depends on having the uncertain resource.

Hazardous Waste Hits Hollywood: Superfund and Housing Prices in Los Angeles

January 2011 – by Ralph Mastromonaco

This paper contributes to the ongoing debate concerning the effect of various actions taken by the U.S. Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the Superfund Program, on housing prices. This study uses a housing transaction panel dataset encompassing the five major counties of the Los Angeles Combined Statistical Area to estimate the program’s influence on the local housing market.

Bright Lines, Risk Beliefs, and Risk Avoidance: Evidence from a Randomized Intervention in Bangladesh

October 2010 – by Lori Bennear, Alessandro Tarozzi, Alexander Pfaff, H.B. Soumya, Kazi Matin Ahmed, and Alexander van Geen

This paper provides evidence on the effects of risk presentation on health behaviors using data from a cluster randomized controlled trial in risk presentation regarding arsenic in drinking water in Araihazar district of Bangladesh. The intervention was designed to test whether highlighting the existence of a gradient in arsenic risk—exposure risk increases with the level of arsenic and lower arsenic exposure is always better—led to better choices relative to “bright line” information provision that focuses on whether the arsenic level is above or below the country standard of 50 parts per billion.

The Value of Disappearing Beaches: A Hedonic Pricing Model with Endogenous Beach Width

September 2010 – by Sathya Gopalakrishnan, Martin D. Smith, Jordan M. Slott, and A. Brad Murray

Beach nourishment is used to rebuild eroding beaches with sand dredged from other locations. Previous studies indicate that beach width positively affects coastal property values, but studies ignore the dynamic features of beaches and the feedback that nourishment has on shoreline retreat. This paper corrects for the resulting attenuation and endogeneity bias in a hedonic property value model by instrumenting for beach width using spatially varying coastal geological features.

Management of an Annual Fishery in the Presence of Ecological Stress: The Case of Shrimp and Hypoxia

September 2010 – by Ling Huang and Martin D. Smith

The emergence of ecosystem-based management suggests that traditional fisheries management and protection of environmental quality are increasingly interrelated. But fishery managers have limited control over most sources of marine and estuarine pollution and at best can only adapt to environmental conditions. This paper presents a bioeconomic model of optimal harvest of an annual species that is subject to an environmental disturbance, and parameterizes the model to analyze the effect of hypoxia (low dissolved oxygen) on the optimal harvest path of brown shrimp, a commercially important species that is fished in hypoxic waters in the Gulf of Mexico and in estuaries in the southeastern United States.

Participatory Protection in Theory and Application: Paper Tigers, Fences and Fines, or Negotiated Co-Management?

August 2010 – by Stefanie Engel, Charles Palmer, and Alexander Pfaff

Forest protection can involve limits on local communities (“fences and fines”), yet some attempts to form protected areas that block local land use are fruitless (“paper tigers”). Participation, i.e., involving communities in forest management (or “co-management”), is a relatively recent innovation in protection which falls between these two endpoints. This working paper models the emergence of negotiated agreements that can share management of and benefits from forest between actors with different objectives, i.e., state and forest user. This paper has been updated on September 7, 2010.

Assessing Improvement in Energy Efficiency of U.S. Auto Assembly Plants

June 2010 – by Gale Boyd

This paper describes the EPA’s voluntary ENERGY STAR program policy approach selected to engage and motivate the automobile manufacturing industry to improve its energy performance, and the results of the industry’s efforts to advance energy management as measured by the updated ENERGY STAR Energy Performance Indicator.