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.