The transition from dirty to clean industries: optimal fiscal policy and the environmental Kuznets curve

This paper investigates privately and socially optimal patterns of economic development in a two-sector endogenous growth model with clean and dirty goods. We consider a second-best fiscal policy framework in which distortionary taxes jointly influence economic growth and environmental quality. In this policy setting, three conditions produce an Environmental Kuznets Curve (EKC): (i) dirty output is bounded; (ii) clean output grows endogenously; and (iii) growth in the dirty sector reduces growth in the clean sector. These conditions do not arise with a consumption externality, but can emerge with a production externality. Endogenous labor supply implications are also investigated. Although not necessary for producing an EKC, endogenous labor supply provides additional linkages that produce an EKC under circumstances in which it would otherwise not appear.     

Emissions targets and the real business cycle: Intensity targets versus caps or taxes

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.     

Emissions targets and the real business cycle: Intensity targets versus caps or taxes

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.     

Environmental policy and human capital inequality: A matter of life and death

This paper analyzes the economic implications of an environmental policy when we account for the life expectancy of heterogeneous agents. In a framework in which everyone suffers from pollution but health status also depends on individual human capital, we find that the economy may be stuck in a trap in which inequality rises steadily, especially when the initial pollution intensity of production is too high. We emphasize that such inequality is in the long run costly for the economy in terms of health and growth. Therefore, we study whether a tax on pollution associated with an investment in pollution abatement can be used to address this situation. We show that a stricter environmental policy may allow the economy to escape from the inequality trap while enhancing the long-term growth rate when the initial inequality in human capital is not too large.     

Environmental policy and misallocation: The productivity effect of intensity standards

Firm-level idiosyncratic policy distortions misallocate resources between firms, lowering aggregate productivity. Many environmental policies create such distortions; in particular, output-based intensity standards (which limit firms energy use or emissions per unit of output) are easier for high-productivity firms to achieve. We investigate the productivity effect of intensity standards using a tractable general-equilibrium model featuring multiple sectors and firm-level heterogeneity. Qualitatively, we demonstrate that intensity standards are always inferior to uniform taxes, as they misallocate both dirty and clean inputs across firms and sectors, which lowers productivity. Quantitatively, we calibrate the model to US data and show that these productivity losses can be large.     

Does the EU ETS cause carbon leakage in European manufacturing?

Carbon leakage is of interest in both academic and policy debates about the effectiveness of unilateral climate policy, especially in Europe, where the EU Emissions Trading System (EU ETS) affects many traded sectors. We review how the literature identifies leakage and the pollution haven effect. We then evaluate whether EU ETS emission costs caused carbon leakage in European manufacturing, using trade flows in embodied carbon and value from the Global Trade Analysis Project (GTAP). We find no evidence that the EU ETS caused carbon leakage.     

Measurement of agricultural total factor productivity growth incorporating environmental factors: A nutrients balance approach

This article proposes to use nutrient-orientated environmental efficiency (EE) measures to construct a nutrient total factor productivity index (NTFP). Since nutrient-orientated EE measures are consistent with the materials balance principle, NTFP index is superior to other existing TFP indexes. An empirical study on the environmental performance of an agricultural sector in 30 OECD countries from 1990 to 2003 yielded several important findings. First, these countries should be able to produce current outputs with at least 50% less aggregate eutrophying power, implying that they should have been able to substantially reduce the potential for eutrophication. Second, traditional TFP has grown by 1.6% per annum due to technical progress; however, there are lags in the responses of several countries to this technical progress. Third, environmental TFP has grown at a slower rate than traditional TFP growth due to reductions in nutrient-orientated allocative efficiency. Finally, changes in input combinations could have significantly improved environmental efficiency and productivity. These findings favor policy interventions and faster technological transfer to improve environmental performance.     

Measurement of agricultural total factor productivity growth incorporating environmental factors: A nutrients balance approach

This article proposes to use nutrient-orientated environmental efficiency (EE) measures to construct a nutrient total factor productivity index (NTFP). Since nutrient-orientated EE measures are consistent with the materials balance principle, NTFP index is superior to other existing TFP indexes. An empirical study on the environmental performance of an agricultural sector in 30 OECD countries from 1990 to 2003 yielded several important findings. First, these countries should be able to produce current outputs with at least 50% less aggregate eutrophying power, implying that they should have been able to substantially reduce the potential for eutrophication. Second, traditional TFP has grown by 1.6% per annum due to technical progress; however, there are lags in the responses of several countries to this technical progress. Third, environmental TFP has grown at a slower rate than traditional TFP growth due to reductions in nutrient-orientated allocative efficiency. Finally, changes in input combinations could have significantly improved environmental efficiency and productivity. These findings favor policy interventions and faster technological transfer to improve environmental performance.     

Environmental Constituent Interest, Green Electricity Policies, and Legislative Voting

Research in political economy has traditionally sought to disentangle the effects of legislative ideology and constituent interest in explaining policy decisions. Frequently, proxy variables are used to measure constituent interest. However, these measures do not adequately reflect true constituent interest, which is based upon the costs and benefits of the policies under consideration, incorporating the scope of the policies. Using Haiku, a detailed model of the US electricity sector, and TAF, an integrated assessment model of pollution pathways and valuation, I construct economic measures of constituent interest at the state level as well as for federal policy. I then use these measures to analyze state adoption of more stringent green electricity policies and congressional roll-call voting on federal environmental policy. Previous studies that use proxy measures of constituent interest typically find that the legislator ideology matters more, while my study shows that both ideology and constituent interest are significant factors.     

Environmental policies and productivity growth: Evidence across industries and firms

This paper investigates the impact of changes in environmental policy stringency on industry- and firm-level productivity growth in a panel of OECD countries. To test the strong version of the Porter Hypothesis (PH), we extend a neo-Schumpeterian productivity model to allow for effects of environmental policies. We use a new environmental policy stringency (EPS) index and let the effect of countries׳ environmental policies vary with the pollution intensity of the industry and with the countries’ and firms’ technological advancement. A tightening of environmental policy is associated with a short-term increase in industry-level productivity growth in the most technologically-advanced countries. This effect diminishes with the distance to the global productivity frontier, eventually becoming insignificant. For the average firm, no evidence of PH is found. However, the most productive firms see a temporary boost in productivity growth, while the less productive ones experience a productivity slowdown.     

A free lunch in the commons

We derive conditions under which raising costs through a regulatory constraint or a fully expropriated tax can increase the profits arising from a common-pool resource. The basic model assumes a fixed number of identical agents with linear costs selling in a single period at an exogenous price. A necessary and sufficient condition for a cost increase to be profitable is that aggregate output from the resource be locally convex in aggregate effort. We also show that cost increases can be profitable even if price is endogenous, agents are heterogeneous, entry is costless, or agents are playing a Markov-perfect equilibrium of a dynamic game. We also discuss more general welfare implications of the result along with its relation to existing results for a Cournot oligopoly.     

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.     

Minimizing the Cost of Keeping Options Open for Conservation in a Changing Climate

Policy documents advocate that managers should keep their options open while planning to protect coastal ecosystems from climate‐change impacts. However, the actual costs and benefits of maintaining flexibility remain largely unexplored, and alternative approaches for decision making under uncertainty may lead to better joint outcomes for conservation and other societal goals. For example, keeping options open for coastal ecosystems incurs opportunity costs for developers. We devised a decision framework that integrates these costs and benefits with probabilistic forecasts for the extent of sea‐level rise to find a balance between coastal ecosystem protection and moderate coastal development. Here, we suggest that instead of keeping their options open managers should incorporate uncertain sea‐level rise predictions into a decision‐making framework that evaluates the benefits and costs of conservation and development. In our example, based on plausible scenarios for sea‐level rise and assuming a risk‐neutral decision maker, we found that substantial development could be accommodated with negligible loss of environmental assets. Characterization of the Pareto efficiency of conservation and development outcomes provides valuable insight into the intensity of trade‐offs between development and conservation. However, additional work is required to improve understanding of the consequences of alternative spatial plans and the value judgments and risk preferences of decision makers and stakeholders. Minimizando el Costo de Mantener Opciones Abiertas para la Conservación en un Clima Cambiante     

On the environmental consequences of intra-industry trade

In the trade and environment debate, the relevance of examining the impact of a location's intra-industry trade (IIT) on environmental quality cannot be overemphasized, in part, due to the increasing prominence of such trade and the paucity of related empirical evidence. Although existing studies largely indicate overall trade to be pro-environment, the consequences of IIT may differ owing to greater varieties of intermediate and final goods, easier technology diffusion via trade in similar goods, productivity gains from within-sector reallocations, and increased innovation. However, identification of the causal effect is plagued by the potential endogeneity of IIT attributable to crucial unobservables and measurement error. In this light, utilizing an instrumental variables strategy and data on multiple environmental indicators from roughly 200 countries over 2000-2005, we investigate IIT's impact on the environment. To measure IIT, we rely on two indexes of within-industry specialization based on changes in and levels of sector-level trade. Regardless of the indicator of IIT or environmental performance, across several sets of instruments, we mostly find (i) IIT to benefit the environment, (ii) overall trade to be less pro-environment than IIT, and (iii) concerns over endogeneity to be relevant.     

Renewable resources in an endogenously growing economy: balanced growth and transitional dynamics

We introduce a renewable resource sector into an endogenous growth model of a small economy, deriving the transitional dynamic equilibrium. The model generates a long-run equilibrium in which a resource sector of limited size can coexist with constant ongoing growth elsewhere. The key feature of the model is the allocation of labor between harvesting the resource and its use in the final output sector. This naturally generates the empirically observed negative relationship between resource abundance and growth. We examine both the dynamic and long-run responses of the economy to various shocks pertaining to technological production conditions and resource sector parameters.     

Plant competition varies with community composition in an edaphically complex landscape

There is currently no consensus on how physical and biological factors affect competitive intensity. Tests of whether competitive intensity varies along axes of environmental change have commonly been conducted in systems with a single strong environmental gradient, such as productivity, a soil resource, or an environmental stress. Frequently, these same axes are associated with changes in species composition, yet few studies have asked whether shifts in the identity of competitors affect competitive intensity. We ask whether resources (nutrients, water), stressors (heavy metals, Ca:Mg ratio), productivity (aboveground biomass), or species identity (an ordination axis of plant community composition) were the best predictors of the intensity of competition in a heterogeneous grassland landscape that included multiple independent environmental gradients. The reproductive fitness of six annual plant species was measured in the presence and absence of competitors and used to calculate relative interaction intensity (RII). We found that RII was best predicted by community composition. Nutrient availability was also important, and a post hoc test showed that competitive intensity was best explained by the combined effects of community composition and nutrient availability. We argue that community composition may be the most effective metric for predicting competitive intensity in many ecosystems because it includes both the competitive effects of the local community and information about covarying environmental characteristics.     

Integrated assessment of agricultural policies with dynamic land use change modelling

With about half of its territory being farmed, agriculture is the main land use in the European Union (EU). As over 10% of the total EU manufacturing output comes from the agri-food sector, it also is an economic factor of great importance. Moreover, EU policy in this sector has far-reaching consequences ranging from the EU's status as a global trade partner to landscape preservation and development. The LUMOCAP Policy Support System is targeted towards policy makers in the European Commission (EC) and its Member States (MS) and aims to provide support in the field of sustainable agricultural and rural development. To this end it incorporates an integrated model with socio-economic and bio-physical processes, operating at different spatial scales. For supporting integrated assessment, a large number of policy levers is included as inputs for these models and outputs are transformed into policy-relevant social, economic and environmental indicators. The whole system is framed in a flexible, modular and easy to use software package that is useable for process experts and policy-analysts alike.This paper describes the integrated model, the individual models and a first calibration of the system. It demonstrates the system's behaviour for typical scenario runs and concludes with a reflection on the current status of the system and some recommendations for further development.     

A regional environmental quality management model: An assessment

The principal purpose of this paper is to discuss the research and policy lessons learned from a large environmental quality management model constructed for the Lower Delaware River Valley Region, The policy lessons involve estimates of the costs of meeting varying standards on air and water quality and the impact on those costs of certain region-wide management alternatives. The research lessons concern: (a) the desirability of considering air and water quality, and solid waste disposal, simultaneously in a single model; (b) the costs of and returns to including nonlinear models of natural systems in a regional optimization framework; and (c) the feasibility of working with constraints on the geographic distribution of the costs of environmental quality improvement within the regional, nonlinear model.     

Environmental policy with upstream pollution abatement technology firms

This paper examines how the existence of an upstream abatement technology sector affects optimal environmental policy. We explore whether the policy should be especially stringent in order to spur a successful export industry based on abatement technology. Furthermore, we investigate if a stringent policy can be used to increase competition in the upstream sector. Our point of departure is a three-stage game between a government in a country with a polluting downstream industry, and a limited number of upstream firms supplying abatement technologies. The government moves first, and may use its environmental policy strategically to influence the behavior of the upstream technology firms. We find that an especially stringent environmental policy towards the polluting downstream sector may be well founded, as it increases competition between the technology suppliers, leading to lower abatement costs. However, to our surprise, an especially stringent environmental policy is not a particularly good industrial policy with respect to developing successful new export sectors based on abatement technology.     

The costs of avoiding environmental impacts from shale‐gas surface infrastructure

Growing energy demand has increased the need to manage conflicts between energy production and the environment. As an example, shale‐gas extraction requires substantial surface infrastructure, which fragments habitats, erodes soils, degrades freshwater systems, and displaces rare species. Strategic planning of shale‐gas infrastructure can reduce trade‐offs between economic and environmental objectives, but the specific nature of these trade‐offs is not known. We estimated the cost of avoiding impacts from land‐use change on forests, wetlands, rare species, and streams from shale‐energy development within leaseholds. We created software for optimally siting shale‐gas surface infrastructure to minimize its environmental impacts at reasonable construction cost. We visually assessed sites before infrastructure optimization to test whether such inspection could be used to predict whether impacts could be avoided at the site. On average, up to 38% of aggregate environmental impacts of infrastructure could be avoided for 20% greater development costs by spatially optimizing infrastructure. However, we found trade‐offs between environmental impacts and costs among sites. In visual inspections, we often distinguished between sites that could be developed to avoid impacts at relatively low cost (29%) and those that could not (20%). Reductions in a metric of aggregate environmental impact could be largely attributed to potential displacement of rare species, sedimentation, and forest fragmentation. Planners and regulators can estimate and use heterogeneous trade‐offs among development sites to create industry‐wide improvements in environmental performance and do so at reasonable costs by, for example, leveraging low‐cost avoidance of impacts at some sites to offset others. This could require substantial effort, but the results and software we provide can facilitate the process.