The optimal time path of clean energy R&D policy when patents have finite lifetime

We study the optimal time path for clean energy innovation policy. In a model with emission reduction through clean energy deployment, and with R&D increasing the overall productivity of clean energy, we describe optimal R&D policies jointly with emission pricing policies. We find that while emission prices can be set at the Pigouvian level independently of innovation policy, the optimal level of R&D subsidies and patent lifetime change with the stages of the climate problem. In the early stages of clean energy development, innovators find it more difficult to capture the social value of their innovations. Thus, for a given finite patent lifetime, optimal clean energy R&D subsidies are initially high, but then fall over time. Alternatively, if research subsidies are kept constant, the optimal patent lifetime should initially be long and fall over time.     

Discounting and relative consumption

We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. We compare the social, private, and conventional Ramsey rates. Assuming a positive growth rate, we find that (1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption, and that (2) the social discount rate is lower than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.     

On the taxation of nonreplenishable natural resources

A resource constraint alters the profit maximizing decision rule for a natural resource producer. Stich a producer also responds differently to common policy instruments. For a zero rate of discount, it is shown that a franchise (lump sum), severance (ad valorem or unit), or profit tax result, respectively, is increased, unchanged, and unchanged output. These results are generalized to the case when the rate of discount is nonzero and tax rates vary over time. A tax-subsidy scheme for guaranteeing the equality of optimal social and private rates of depletion is presented for a case where these rates diverge.     

Announcing climate policy: Can a green paradox arise without scarcity?

Unintended consequences of a pre-announced climate policy are studied within a framework that allows for competition between polluting and clean energy sources. We show that early announcement of a carbon tax gives rise to a “green-paradox,” in that it increases emissions in the interim period (between announcement and actual implementation), irrespective of the scarcity of fossil fuels. The paradoxical outcome is driven by consumption-saving tradeoffs facing households who seek to smooth consumption over time and holds both when the announced implementation date is taken as a credible threat and when households are skeptical about the (political) will or capability of the government to implement the policy as announced.     

Redistribution and pollution taxes with non-linear Engel curves

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.     

Discounting for personal and social payments: Patience for others,impatience for ourselves

The market rate of return on private investment is often used as the discount rate when conducting cost-benefit analysis (CBA) of public projects. I argue that the decision to invest pits current consumption against future consumption, both of which accumulate to the private decision maker. Public projects, on the other hand, provide benefits that accrue to society in general. To examine the appropriateness of discount rates based on returns to private investment, this paper considers lab experiments designed to test whether individuals discount personal and social benefits at different rates. Personal benefits are captured through personal monetary payments, while social benefits are captured through anonymous donations to charitable organizations. I jointly elicit time and risk preferences and find that subjects discount charitable contributions at significantly lower rates than personal payments.     

Providing the Spark: Impact of financial incentives on battery electric vehicle adoption

To overcome adoption barriers and promote battery electric vehicles (BEVs) as an energy efficient consumer transportation option, a number of states offer subsidies to consumers for BEVs. We use a national data set of vehicle registrations and state-level financial incentives to assess the impact of vehicle purchase subsidies on adoption using both difference-in-differences and synthetic controls methods. We find that incentives offered as direct purchase rebates generate increased levels of new BEV registrations at a rate of approximately 8 percent per thousand dollars of incentive offered. Between 2011 and 2015, vehicle rebate incentives are associated with an increase in overall BEV registrations of approximately 11 percent. Our findings indicate incentives offered as state income tax credits do not have a statistically significant effect on BEV adoptions, though we caution this may be a result of limited temporal variation in BEV incentives across our sample. Responses to rebate incentives do not differ significantly by the make of the vehicle purchased (i.e., Tesla and non-Tesla vehicles). We combine our results with recent assessments of marginal environmental costs of electric vehicle charging and measure net welfare effects of BEV subsidy programs. Our analysis indicates these programs are not welfare-improving if only considering benefits associated with avoided emissions. Additional benefits associated with long-term market growth, production cost savings, network externalities, or accelerated innovation could substantially impact the net welfare outcomes.     

Discounting for personal and social payments: Patience for others,impatience for ourselves

The market rate of return on private investment is often used as the discount rate when conducting cost-benefit analysis (CBA) of public projects. I argue that the decision to invest pits current consumption against future consumption, both of which accumulate to the private decision maker. Public projects, on the other hand, provide benefits that accrue to society in general. To examine the appropriateness of discount rates based on returns to private investment, this paper considers lab experiments designed to test whether individuals discount personal and social benefits at different rates. Personal benefits are captured through personal monetary payments, while social benefits are captured through anonymous donations to charitable organizations. I jointly elicit time and risk preferences and find that subjects discount charitable contributions at significantly lower rates than personal payments.     

Announcing climate policy: Can a green paradox arise without scarcity?

Unintended consequences of a pre-announced climate policy are studied within a framework that allows for competition between polluting and clean energy sources. We show that early announcement of a carbon tax gives rise to a “green-paradox,” in that it increases emissions in the interim period (between announcement and actual implementation), irrespective of the scarcity of fossil fuels. The paradoxical outcome is driven by consumption-saving tradeoffs facing households who seek to smooth consumption over time and holds both when the announced implementation date is taken as a credible threat and when households are skeptical about the (political) will or capability of the government to implement the policy as announced.     

Complementarity,impatience, and the resilience of natural-resource-dependent economies

We study how society's preferences affect the resilience of economies that depend on more than one type of natural resource. In particular, we analyze whether the degree of complementarity of natural resources in consumer preferences may give rise to multiple steady states and path dependence even when resources are managed optimally. We find that, for a given social discount rate, society tends to be less willing to buffer exogenous shocks if resource good are complements in consumption than if they are substitutes. The stronger the complementarity between the various types of natural resources, the less resilient the economy is, and even more so the higher is the social discount rate.     

Giving green to get green? Incentives and consumer adoption of hybrid vehicle technology

Federal, state, and local governments use a variety of incentives to induce consumer adoption of hybrid-electric vehicles. We study the relative efficacy of state sales tax waivers, income tax credits, and non-tax incentives and find that the type of tax incentive offered is as important as the generosity of the incentive. Conditional on value, sales tax waivers are associated with more than a ten-fold increase in hybrid sales relative to income tax credits. In addition, we examine how adoption varies with fuel prices. Rising gasoline prices are associated with greater hybrid vehicle sales, but this effect operates almost entirely through high fuel-economy vehicles. By comparing consumer response to sales tax waivers and estimated future fuel savings, we estimate an implicit discount rate of 14.6% on future fuel savings.     

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.     

Incentives to diffuse advanced abatement technology under environmental liability law

Polluting firms with advanced abatement technology at their disposal have incentives or disincentives to share this technology with other polluting firms. The ‘direction’ and extent of those incentives depends on the liability rule applicable and the way technical change impacts marginal abatement costs. We establish that incentives for diffusion are socially optimal under strict liability and socially suboptimal under negligence if technical change lowers marginal abatement costs for all levels of abatement. Negligence may, however, induce better diffusion incentives than strict liability if technical change decreases (increases) marginal abatement costs for low (high) levels of abatement.     

Regulation with direct benefits of information disclosure and imperfect monitoring

We model the optimal design of programs requiring heterogeneous firms to disclose harmful emissions when disclosure yields both direct and indirect benefits. The indirect benefit arises from the internalization of social costs and resulting reduction in emissions. The direct benefit results from the disclosure of previously private information which is valuable to potentially harmed parties. Previous theoretical and empirical analyses of such programs restrict attention to the former benefit while the stated motivation for such programs highlights the latter benefit. When disclosure yields both direct and indirect benefits, policymakers face a tradeoff between inducing truthful self-reporting and deterring emissions. Internalizing the social costs of emissions, such as through an emissions tax, will deter emissions, but may also reduce incentives for firms to truthfully report their emissions.     

Optimal pollution in the presence of adjustment costs

This paper explores optimal pollution control when pollution is considered a stock and costs of treating pollution are a function both of the level and rate of change of pollution control. It is shown that even if the long run optimum stock of pollution is below the initial level adjustment costs may imply an optimally increasing stock of pollution in the short run. The results obtained are contrasted with those which emerge when adjustment costs are absent and when damages are taken to be a function of the flow of pollution; the appropriate tax rates of polluting discharges are examined.     

Stochastic pollution, costly sanctions, and optimality of emission permit banking

This paper identifies a new economic motive for pollution regulations that allow polluting firms to bank and borrow emission permits over time. When aggregate pollution is stochastic, an intertemporal permit trading regime can provide firms with efficient incentives for pollution abatement without the need for costly government enforcement actions that would otherwise be required.     

Environmental policy à la carte: Letting firms choose their regulation

Under uncertainty, the optimal choice between price and quantity instruments depends on the technology of the regulated firms, which is often private information. We consider an environmental policy that delegates the prices-versus-quantities decision to the firms by offering them the choice between an emissions tax and permit trading. Such an approach is currently used in Swiss climate policy. We provide a detailed characterization of the optimal policy and show that this approach reduces expected social costs compared to a pure tax or permit-trading regime. We demonstrate that an optimal allocation of firms to instruments can be achieved despite substantial informational constraints, and that all firms gain from the introduction of the instrument choice compared to optimally designed single-instrument policies. Furthermore, we discuss the conditions under which this approach is likely to be preferable to a hybrid regulation.     

Discounting in the presence of scarce ecosystem services

The discount rate for cost-benefit analysis has to take account of future scarcity of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey growth model, the paper distinguishes three cases. If ecosystem services can be easily substituted, the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.     

Optimal timing of carbon capture policies under learning-by-doing

Using a standard Hotelling model of resource exploitation, we determine the optimal energy consumption paths from three options: dirty coal, which is non-renewable and carbon-emitting; clean coal, which is also non-renewable but carbon-free thanks to carbon capture and storage (CCS); and solar energy, which is renewable and carbon-free. We assume that the atmospheric carbon stock cannot exceed an exogenously given ceiling. Taking into account learning-by-doing in CCS technology, we show the following results: (i) clean coal exploitation cannot begin before the outset of the carbon constrained phase and must stop strictly before the end of this phase; (ii) the energy price path can evolve non-monotonically over time; and (iii) when the solar cost is low enough, an unusual energy consumption sequence along with solar energy is interrupted for some time and replacement by clean coal may exist.     

A qualitative characterization of the competitive nonrenewable resource extracting firm

Using variational differential equations, a systematic qualitative analysis is carried out for the competitive nonrenewable resource extracting firm. The parameters of interest are the output price, variable input price, discount rate, lease length, initial resource stock, and various tax rates. The effects of changes in these parameters on the entire optimal time paths of the current shadow value of the stock, the resource stock, and the extraction rate are characterized in the perturbed phase plane.