Prospect theory and energy efficiency

Investments in energy efficiency entail uncertainty, and when faced with uncertainty consumers have been shown to behave according to prospect theory: preferences are reference-dependent and exhibit loss aversion, and probabilities are subjectively weighted. Using data from a choice experiment eliciting prospect theory parameters, I provide evidence that loss-averse people are less likely to invest in energy efficiency. Then, I consider policy design under prospect theory when there are also externalities from energy use. A higher degree of loss aversion implies a higher subsidy to energy efficiency. Numerical simulations suggest that the impact of prospect theory on policy may be substantial.     

Competing land uses and fossil fuel,and optimal energy conversion rates during the transition toward a green economy under a pollution stock constraint

We study the transition to a carbon-free economy in a model with a polluting non-renewable resource and a clean renewable resource. Transforming primary energy into ready-to-use energy services is costly and more efficient energy transformation rates are more costly to achieve. Renewable energy competes with food production for land and the food productivity of land can be improved at some cost. To avoid catastrophic climate damages, the pollution stock is mandated to stay below a given cap. When the economy is not constrained by the cap, the efficiency of energy transformation increases steadily until the transition toward the ultimate green economy; when renewable energy is exploited, its land use rises at the expense of food production; food productivity increases together with the land rent but food production drops; the food and energy prices increase and renewables substitute for non-renewable energy. During the constrained phase, the economy follows a constant path of prices, quantities, efficiency rates, food productivity and land rent, a phenomenon we call the ‘ceiling efficiency paradox’.     

Price perceptions in water demand

Economists advocate for using the price mechanism to manage water scarcity, but complex nonlinear rate structures prevalent in markets for municipal water obscure price signals. We conduct a randomized field experiment that jointly elicits knowledge about the cost of water and examines the impact of improved information on demand by linking a survey to water billing records. Half of our sample of 30,000 single family homeowners are randomly sent an invitation to a survey that asks questions about the water bill and the costs of water-use activities (e.g. the cost of taking a shower), and subsequently provides personalized accurate information. Results show that consumers have poor information about the marginal price of water and overestimate the costs of using water. Respondents are relatively better informed about their total bill and water consumption. In aggregate, respondents increase water use in response to the survey, potentially due to learning that water is cheaper than they previously thought. Increased consumption is concentrated among low users who are more likely to over-estimate the costs of using water.     

Taxing overexploited open-access fisheries: the role of demand elasticity

The paper aims at identifying the effects exerted by a tax levy on an overexploited and previously unregulated fishery. The analysis is carried out by means of a dynamic model that includes fish stock and harvesting effort as state variables. Attention is focused on the role played by demand elasticity which is shown to affect both transients and equilibria.According to the analysis, a levy induces a contraction in effort, which is sharper in the short term. As a consequence, the fish population recovers and ultimately settles at a higher equilibrium level. Therefore, a larger amount of fish is caught in the long run and sold at a lower price than in the unregulated setting. The more inelastic the demand, the smaller both the equilibrium price for fish and the tax imposed.     

A sceptical vision of the environmental Kuznets curve: The case of sulfur dioxide

The aim of this paper is to check the hypothesis for the environmental Kuznets curve for sulfur dioxide. This involved analysis of: 1. the theoretical basis of the model; 2. the technical problem of SO2 generation; 3 the kind of information used in the estimations; 4. changes in the structure of electric energy production; 5. improvements in energy efficiency; and 6. the recent introduction of cleaning mechanisms in a favourable political context. The conclusion is that, if it is possible to prove the existence of environmental Kuznets curve models, their utility as instruments of economic policy is debatable.     

Do energy efficiency standards hurt consumers? Evidence from household appliance sales

We build novel welfare-based price indices for major household appliances that leverage changes in same-model prices and how consumers substitute between exiting, continuing and new models. We then evaluate how minimum energy efficiency requirements and changing criteria for Energy Star™ labels affected these indices in the U.S. between 2001 and 2011, a period of time when some appliances experienced standard changes while others did not. We find that prices declined while quality and consumer welfare increased, especially when standards become more stringent. We also find that much of the price index decline can be attributed to standards-induced innovation, or cannibalism, not to inter-manufacturer competition. Our results also add to a growing body of evidence that the Consumer Price Index exaggerates inflation due to inadequate account of quality and substitution to new goods.     

Non-cooperative and cooperative climate policies with anticipated breakthrough technology

Global warming can be curbed by pricing carbon emissions and thus substituting fossil fuel with renewable energy consumption. Breakthrough technologies (e.g., fusion energy) can reduce the cost of such policies. However, the chance of such a technology coming to market depends on investment. We model breakthroughs as an irreversible tipping point in a multi-country world, with different degrees of international cooperation. We show that international spill-over effects of R&D in carbon-free technologies lead to double free-riding, strategic over-pollution and underinvestment in green R&D, thus making climate change mitigation more difficult. We also show how the demand structure determines whether carbon pricing and R&D policies are substitutes or complements.     

On equilibrium in resource markets with scale economies and stochastic prices

In this paper, I show the existence and the characteristics of equilibrium in a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks, an empirically relevant setting. In my model firms may be motivated to hold inventories to facilitate production smoothing, which allows them to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted. This aspect of the model then supports a competitive equilibrium in the presence of non-convex costs. Casual empirical evidence is provided that supports the central features of my model for a variety of non-renewable resources, lending credence to the explanation for equilibrium I propose.     

On equilibrium in resource markets with scale economies and stochastic prices

In this paper, I show the existence and the characteristics of equilibrium in a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks, an empirically relevant setting. In my model firms may be motivated to hold inventories to facilitate production smoothing, which allows them to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted. This aspect of the model then supports a competitive equilibrium in the presence of non-convex costs. Casual empirical evidence is provided that supports the central features of my model for a variety of non-renewable resources, lending credence to the explanation for equilibrium I propose.     

Microclimate effects of wind farms on local crop yields

This paper considers a novel spillover effect of wind farms - microclimate impacts on neighboring crop yields. Using US county-level crop and wind capacity data, I examine the effects of wind energy development on crop yields, controlling for time-invariant county characteristics and state-level annual shocks. I find robust evidence that counties with increased wind power development have also experienced increased corn and other crop yields, such that an additional 100 MW of wind capacity increases county yields by roughly 1%. At recent prices, this implies a more than $5 dollar per megawatt-hour local benefit, corresponding to several hundred million dollars in annual benefits.     

Substitution between biofuels and fossil fuels: Is there a green paradox?

We show that (i) subsidies for renewable energy policies with the intention of encouraging substitution away from fossil fuels may accentuate climate change damages by hastening fossil fuel extraction, and that (ii) the opposite result holds under some specified conditions. We focus on the case of subsidies for renewable resources produced under increasing marginal costs, and assume that both the renewable resources and the fossil fuels are currently in use. Such subsidies have a direct effect and an indirect effect working in opposite directions. The direct effect is the reduction in demand for fossil fuels at any given price. The indirect effect is the reduction in the current equilibrium price for fossil fuels, which tends to increase the amount of fossil fuels demanded. Whether the sum of the two effects will actually result in an earlier or later date of exhaustion of the stock of fossil fuels depends on the curvature of the demand curve for energy and of the supply curve for the renewable substitute.     

The impact of flooding on property prices: A repeat-sales approach

In this paper we use a repeat-sales model to analyse the price path of properties affected by flooding in England between 1995 and 2014. Our dataset contains information on 4.8 million houses with at least one repeat-sale. This database is merged with high-definition GIS data delineating the spatial extent of all recorded flood incidents in England covering a total area of 2,654 km². Our results show that immediately after a flood event the price of property in a postcode entirely inundated by inland flooding is on average 24.9% lower than non-flooded property, whereas for property in a postcode entirely inundated by coastal flooding the price reduction is 21.1%. Nonetheless, we find that this discount is short-lived and the discount is no longer statistically significant for properties affected by inland flooding after 5 years, which falls to just 4 years for properties affected by coastal flooding. For lower-priced properties however, the post-flood price discount can be observed up to 6–7 years for both inland and coastal flooding. The magnitude of the impact also depends on the characteristics of the properties, the characteristics of the flood and the existence of flood protection assets.     

Substitution between biofuels and fossil fuels: Is there a green paradox?

We show that (i) subsidies for renewable energy policies with the intention of encouraging substitution away from fossil fuels may accentuate climate change damages by hastening fossil fuel extraction, and that (ii) the opposite result holds under some specified conditions. We focus on the case of subsidies for renewable resources produced under increasing marginal costs, and assume that both the renewable resources and the fossil fuels are currently in use. Such subsidies have a direct effect and an indirect effect working in opposite directions. The direct effect is the reduction in demand for fossil fuels at any given price. The indirect effect is the reduction in the current equilibrium price for fossil fuels, which tends to increase the amount of fossil fuels demanded. Whether the sum of the two effects will actually result in an earlier or later date of exhaustion of the stock of fossil fuels depends on the curvature of the demand curve for energy and of the supply curve for the renewable substitute.     

Price controls and banking in emissions trading: An experimental evaluation

We present results from laboratory emissions markets designed to investigate the effects of price controls and permit banking on limiting permit price risk. While both instruments reduce between-period price volatility and within-period price dispersion, combining price controls and permit banking yields important benefits. Banking alone produces high permit prices in earlier periods that fall over time, but the combined policy produces lower initial prices and lower volatility. However, banking, price controls, and the combination all produce higher between-period emissions volatility. Hence, for emissions markets that seek to control flow pollutants with strictly convex damages, efforts to limit permit price risk can result in higher expected damage.     

Environmental regulation as a double-edged sword for housing markets: Evidence from the NOx Budget Trading Program

We investigate the effects of environmental regulations on housing markets using a quasi-experimental setting—the NO_x Budget Trading Program (NBP). Hedonic theory predicts that house prices should rise as pollution levels decrease. However, environmental regulations may also affect labor markets, and thus housing demand. Employing a difference-in-differences framework, we find that house prices shifted up in the regulated areas with low manufacturing intensity, whereas in the areas with high manufacturing intensity, housing markets were weakened. We also find that in high-manufacturing-intensity areas, loan application volume declined, rejection rate augmented, and the probability of loan default increased.     

Do energy prices affect employment? Decomposed international evidence

This paper analyzes the energy price-employment nexus and contributes to the literature by showing that it is important to decompose the regulatory effect into demand, cost, and factor-shift effects. This is done by means of a cross-country multi-sectoral dataset. The results show that both rising energy prices and shadow prices of energy have no significant effect on net employment when the manufacturing sectors only are analyzed. While finding significant variations across countries, the average employment effects become significantly positive once jobs in the economy as a whole are considered. This change is driven mainly by larger positive cost effects, which more than offset the negative demand effects and reductions in the positive factor-shift effects. Moreover, the paper reveals that the often implemented approach of using a simple regulation regressor, instead of decomposing the employment effect, can result in biased estimates.     

Innovation and the dynamics of global warming

Global warming and the carbon cycle are a dynamic system with positive feedbacks. Fossil fuels are exhaustible resources. These two facts mean that innovation in clean energy technology, rather than mitigating global warming, can lead to a permanently higher temperature path. This paper explores the impact of innovation in the simplest model linking the economic theory of exhaustible resources with positive feedback dynamics in the carbon cycle.     

Carbon taxation,OPEC and the end of oil

I develop a differential game between an oil cartel and an importer investing in research and development (R&D) to reduce the cost of a green substitute to oil. In equilibrium, the cartel is forced to deter the substitute, which thus imposes a price ceiling falling over time. Credible carbon taxes are below the Pigovian level, implying the importer cannot internalise the full pollution externality, much less capture resource rents. Without carbon pricing, the importer curtails long-run pollution using a costly R&D programme. Normatively, climate policy will be more expensive if relying on green R&D programmes only.     

When do environmental regulations backfire? Onsite industrial electricity generation,energy efficiency and policy instruments

More than half of all energy produced by electric utilities is lost in the form of waste heat. However, when manufacturing facilities choose to produce their own electricity, this waste heat is captured by Combined Heating and Power (CHP) technologies and used in the production process. As a result, manufacturers' pollution footprint can be dramatically reduced by choosing to produce electricity onsite rather than purchasing it from a utility. This paper uses Census microdata to study manufacturers’ decision to produce electricity onsite and examines how plants adjust onsite generation when they are subject to environmental regulations. Environmental regulations will backfire if they cause manufacturers to produce less electricity onsite and shift to electricity from less efficient, offsite electric utilities. We find that manufacturing plants subject to NOx command-and-control regulations decrease onsite electricity generation, increase electricity purchases from off-site utilities and see declines in their energy efficiency. However, manufacturers subject to cap-and-trade see no decline in onsite generation and experience improvements in energy efficiency. These findings demonstrate the importance of instrument selection and identify a new pathway through which emissions leakage may occur.