Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications

We consider a simulation of risk-averse producers when making investment decisions in a competitive energy market, who face uncertainty about future regulation of carbon dioxide emissions. Investments are made under regulatory uncertainty; then the regulatory state is revealed and producers realize returns. We consider anticipated taxes, grandfathered permits and auctioned permits and show that some anticipated policies increase investment in the relatively dirty technology. Beliefs about the policy instrument that will be used to price carbon may be as important as certainty that carbon will be priced. More generally, a failure to consider risk aversion may bias policy analysis for the power sector.     

Risk aversion and adaptive management: Insights from a multi-armed bandit model of invasive species risk

This article explores adaptive management (AM) for decision-making under environmental uncertainty. In the context of targeting invasive species inspections of agricultural imports, I find that risk aversion increases the relative value of AM and can increase the rate of exploratory action. While calls for AM in natural resource management are common, many analyses have identified modest gains from this approach. I analytically and numerically examine the distribution of outcomes from AM under risk neutrality and risk aversion. The inspection decision is framed as a multi-armed bandit problem and solved using the Lagrangian decomposition method. Results show that even when expected gains are modest, asymmetry in the distribution of outcomes has important implications. Notably, AM can serve to buffer against large losses, even if the most likely outcome is a small loss.     

Durable goods and long-run electricity demand: Evidence from air conditioner purchase behavior

I estimate a dynamic structural model of demand for air conditioners, the most energy-intensive home appliance in the US. The model explores the links between demand for durable goods and expected changes in key attributes: energy efficiency and price. I incorporate expectations explicitly as a feature of the choice setting, and use parameter estimates from the model to calculate durable good demand elasticities with respect to energy efficiency, electricity price, and price of the durable itself. These estimates fill a large gap in the literature, and also shed light on consumer behavior in this setting. Results indicate that consumers are forward-looking and value the stream of future savings derived from energy efficiency.     

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.     

Uncertainty and measurement error in welfare models for risk changes

Most welfare models of environmental or mortality risk reductions assume that risks are exogenously determined and known with certainty. However, a growing body of research suggests that uncertainty about risks can affect choices over risky prospects. I present a decision-weighted random-utility model that decomposes welfare losses into those attributable to an increase in the deterministic component of risk and those attributable to uncertainty about risk. I apply the model to an illustrative dataset of subjects' perceived mortality risk and willingness to accept the risk of nuclear-waste transport. I estimate the model using Lewbel's (2000) strictly exogenous regressor approach to account for endogeneity bias and measurement error. Subjects display aversion to both risk and uncertainty about the risk of a transport accident, so that increases in either leads to social-welfare losses. Roughly 12% of the external cost of nuclear-waste transport is attributable to the public's uncertainty about transport risk.     

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.     

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’.     

The endowment effect,discounting and the environment

There is a considerable body of evidence showing that our preferences exhibit both reference dependence and loss aversion, a.k.a. the endowment effect. In this paper, we consider the implications of the endowment effect for discounting, with a special focus on discounting future improvements in the environment. We show that the endowment effect modifies the discount rate via (i) an instantaneous endowment effect and (ii) a reference-updating effect. Moreover we show that these two effects often combine to dampen the preference to smooth consumption over time. What this implies for discounting future environmental benefits may then depend critically on whether environmental quality is merely a factor of production of material consumption, or whether it is an amenity. On an increasing path of material consumption, dampened consumption smoothing implies a lower discount rate. But on a declining path of environmental quality and where we derive utility directly from environmental quality, it implies a higher discount rate. On non-monotonic paths, loss aversion specifically can give rise to substantial discontinuities in the discount rate.     

Ecosystems and human health: The local benefits of forest cover in Indonesia

This paper documents the effect of primary forest cover loss on increased incidence of malaria. The evidence is consistent with an ecological response. I show that land use change, anti-malarial programs or migration cannot explain the effect of primary forest cover loss on increased malarial incidence. Falsification tests reveal that the effect is specific to malaria, with forest cover having no discernible effect on other diseases with a disease ecology different from that of malaria. Back-of-the-envelope calculations indicate that the morbidity-related malaria-reducing local benefits of primary forests are at least $1-$2 per hectare.     

Generating spatially optimized habitat in a trade‐off between social optimality and budget efficiency

Auctions have been proposed as alternatives to payments for environmental services when spatial interactions and costs are better known to landowners than to the conservation agency (asymmetric information). Recently, an auction scheme was proposed that delivers optimal conservation in the sense that social welfare is maximized. I examined the social welfare and the budget efficiency delivered by this scheme, where social welfare represents the difference between the monetized ecological benefit and the conservation cost incurred to the landowners and budget efficiency is defined as maximizing the ecological benefit for a given conservation budget. For the analysis, I considered a stylized landscape with land patches that can be used for agriculture or conservation. The ecological benefit was measured by an objective function that increases with increasing number and spatial aggregation of conserved land patches. I compared the social welfare and the budget efficiency of the auction scheme with an agglomeration payment, a policy scheme that considers spatial interactions and that was proposed recently. The auction delivered a higher level of social welfare than the agglomeration payment. However, the agglomeration payment was more efficient budgetarily than the auction, so the comparative performances of the 2 schemes depended on the chosen policy criterion–social welfare or budget efficiency. Both policy criteria are relevant for conservation. Which one should be chosen depends on the problem at hand, for example, whether social preferences should be taken into account in the decision of how much money to invest in conservation or whether the available conservation budget is strictly limited.     

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.     

A behavioral rebound effect

Pro-environmental behaviors are an important avenue for mitigating environmental impacts. Technological improvements are also a vital tool for reducing environmental damage from consumption. However, their benefits are partially offset by the direct rebound effect, whereby a consumer rationally responds to an increase in resource use efficiency by consuming more. This paper investigates whether technological improvement might also reduce behaviorally motivated mitigation of environmental damage. A behavioral rebound effect operates through two channels. First, pro-environmental effort is reduced after a decrease in marginal environmental damage. Second, moral licensing reduces pro-environmental effort further when technological change is endogenous. I develop a novel real effort laboratory experiment to identify these behaviors. I find a positive behavioral rebound effect. I also find evidence consistent with moral licensing, which is strongest among subjects with a higher degree of pro-environmental attitudes and beliefs. Subjects’ baseline level of pro-environmental effort is driven by beliefs about social norms.     

Emission control policies under uncertainty

The paper deals with the problem of optimal environmental policy under uncertainty. Usually, when an environmental policy is considered, only the expected values of the parameters of the marginal benefit and marginal cost functions associated with the policy are known. Thus a relevant question is: In the presence of uncertainty, what is the optimal policy mean for achieving the environmental objective? The study addresses itself to the specific objective of improving air quality although the analysis is generally applicable. The policy means are emission taxes and emission quotas. It is shown that under uncertainty neither of these means is generally optimal, and that specific parameter values of the costs and benefits relations and their distributions determine the optimal policy for each situation.     

Individual-based modelling of fishermen search behaviour with neural networks and reinforcement learning

A model to mimic the search behaviour of fishermen is built with two neural networks to cope with two separate decision-making processes in fishing activities. One neural network deals with decisions to stay or move to new fishing grounds and the other is constructed for the purpose of finding prey within the fishing areas. Some similarities with the behaviour of real fishermen are found: concentrated local search once a prey has been located to increase the probability of remaining near a prey patch and the straightforward movement to other fishing grounds. The artificial fisherman prefers areas near the port when conditions in different fishing grounds are similar or when there is high uncertainty in its world. In the latter case a reluctance to navigate to other areas is observed. The artificial fisherman selects areas with higher concentration of prey, even if they are far from the port of departure, unless a high uncertainty is related to the fishing ground. Connected areas are preferred and followed in orderly fashion if a higher catch is expected. The observed behaviour of the artificial fisherman in uncertain scenarios can be described as a risk-averse attitude. The approach seems appropriate for an individual-based modelling of fishery systems, focusing on the learning and adaptive characteristics of fishermen and on interactions that take place at a fine scale.     

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.     

Bag leakage: The effect of disposable carryout bag regulations on unregulated bags

Leakage occurs when partial regulation of consumer products results in increased consumption of these products in unregulated domains. This article quantifies plastic leakage from the banning of plastic carryout bags. Using quasi-random policy variation in California, I find the elimination of 40 million pounds of plastic carryout bags is offset by a 12 million pound increase in trash bag purchases—with small, medium, and tall trash bag sales increasing by 120%, 64%, and 6%, respectively. The results further reveal 12–22% of plastic carryout bags were reused as trash bags pre-regulation and show bag bans shift consumers towards fewer but heavier bags. With a substantial proportion of carryout bags already reused in a way that avoided the manufacture and purchase of another plastic bag, policy evaluations that ignore leakage effects overstate the regulation's welfare gains.     

The social cost of carbon revisited

An estimate of the social cost of carbon (SCC) is crucial to climate policy. But how should we estimate the SCC? A common approach uses an integrated assessment model (IAM) to simulate time paths for the atmospheric CO₂ concentration, its impact on temperature, and resulting reductions in GDP. I have argued that IAMs have deficiencies that make them poorly suited for this job, but what is the alternative? I present an approach to estimating an average SCC, which I argue can be a useful guide for policy. I rely on a survey of experts to elicit opinions regarding (1) probabilities of alternative economic outcomes of climate change, but not the causes of those outcomes; and (2) the reduction in emissions required to avert an extreme outcome, i.e., a large climate-induced reduction in GDP. The average SCC is the ratio of the present value of lost GDP from an extreme outcome to the total emission reduction needed to avert that outcome. I discuss the survey instrument, explain how experts were identified, and present results. I obtain SCC estimates of $200/mt or higher, but the variation across experts is large. Trimming outliers and focusing on experts who expressed a high degree of confidence in their answers yields lower SCCs, $80 to $100/mt, but still well above the IAM-based estimates used by the U.S. government.     

Preferred policies when there is a concern for probability of adoption

A theory of effective policy choice is developed that recognizes that the probability that a policy is adopted depends on who gains from it, who loses, and by how much. Ten pieces of recent environmental legislation are assessed to see how mechanisms such as coupling with other legislation, phased implementation, and the manipulation of uncertainty can spread benefits and costs. Several optimizing models are presented that explicitly incorporate the probability of adoption.     

Energy performance certification and time on the market

This paper analyzes whether energy performance certificates (EPCs) serve as means to reduce the information asymmetry among market participants during the sale of homes. Using a sample of 876,000 single-family homes in the Netherlands, we examine the impact of EPC adoption on the speed of sale. Our results indicate that energy-rated homes sell faster than non-energy-rated homes, an effect that varies by 7–12 percent depending on model specifications and increases when positive (green) ratings are granted. The information conveyed by these certificates reduces the information asymmetry between buyers and sellers, which helps to reduce the uncertainty of quality.     

Sustainable urban development: Policy framework for sustainable consumption and production

The environmental impact of consumption and production is diverse and wide-reaching: air, water and ground pollutants are emitted during different phases of a life cycle, natural resources are overexploited and ecosystems are degraded. Changing consumption patterns in Asia forecast major impacts from increased demand for electric and electronic goods, cars and processed and protein-rich food, as well as buildings. While some countries have adopted policy at a strategic level to promote sustainable consumption and production, most countries, in particular developing countries in the Asia-Pacific region, do not have a comprehensive policy on sustainable consumption and production but would have much to gain from building on this new approach. The aim of this paper is to elaborate on current theory and practice in the area of sustainable production and consumption focusing on sustainable urban development. The paper will: 1) analyse current policy thinking in the field of regional sustainable consumption and production; 2) identify issues for regional policy development in the same fields; and 3) propose regional public policy related to sustainable consumption and production patterns, such as improved energy efficiency and use of alternative energy.