Environment and Energy Economics

March 3-4, 2017
Christopher R. Knittel of MIT and Paulina Oliva of the University of California at Irvine, Organizers

Sharat Ganapati, Yale University; Joseph S. Shapiro, Yale University and NBER; and Reed Walker, the University of California at Berkeley and NBER

The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-Through (NBER Working Paper No. 22281)

This paper estimates how increases in production costs due to energy inputs affect consumer versus producer surplus (i.e., incidence). In doing so, Ganapati, Shapiro, and Walker develop a general methodology to measure the incidence of changes in input costs that can account for three first-order issues: factor substitution amongst inputs used for production, incomplete pass-through of input costs, and industry competitiveness. The researchers apply this methodology to a set of U.S. manufacturing industries for which they observe plant-level output prices and input costs. They find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. This implies that the share of welfare cost borne by consumers is 25-75 percent smaller (and the share borne by producers is correspondingly larger) than most existing work assumes.

Joshua A. Lewis, the University of Montreal, and Edson R. Severnini, Carnegie Mellon University

Short- and Long-Run Impacts of Rural Electrification: Evidence from the Historical Rollout of the U.S. Power Grid

Investment in large scale infrastructure projects has long been considered a transformative force for the economy. Historically and today, electrification has figured prominently among these projects, but its estimated short-run impacts have been mixed, and its long-run effects have yet to be evaluated. In this study, Lewis and Severnini exploit the historical rollout of the U.S. power grid between 1930 and 1960 to examine the evolving impacts of rural electrification on the local economy. They have two main findings. First, rural electrification led to an immediate increase in farmland value and an expansion in the rural sector, but had no impact on local wages or nonagricultural sectors. These estimates imply large short-run gains to rural welfare that exceeded the historical cost of extending the grid, and were driven by improvements in agricultural productivity and rural housing quality. Second, rural counties that gained early access to electricity experienced economic growth that lasted decades after the country was fully electrified. Although the relative expansion in the agricultural sector was short-lived, growth in property values, income, and nonagricultural employment persisted. This long-run expansion was particularly large in rural counties located near metropolitan areas, suggesting that rural electrification helped fuel suburban growth. These historically evolving impacts demonstrate how rural electrification can foster broader local development, and highlight the importance of accounting for long-run responses when making electricity infrastructure investment decisions.

T. Robert Fetter and Andrew L. Steck, Duke University; Christopher Timmins, Duke University and NBER; and Douglas Wrenn, Pennsylvania State University

Learning by Viewing? Social Learning, Regulatory Disclosure and Firm Productivity in Shale Gas

Firms can learn about new technologies from other adopters, though they do not always exploit this form of social learning. Fetter, Steck, Timmins, and Wrenn examine whether shale gas operators took advantage of environmentally-focused disclosure laws to learn from competitors and improve productivity; with this information, the researchers evaluate the claim that chemical disclosure rules expose valuable trade secrets. They exploit an unusual regulatory episode in Pennsylvania that allows them to see chemical inputs prior to public disclosure. Using detailed data on well-level inputs and outputs, they study how the change in disclosure regime affected operators' chemical use and well productivity.

Nicholas Ryan, Yale University and NBER

Is There an Energy-Efficiency Gap?: Experimental Evidence from Indian Manufacturing Plants

Climate policy pushes energy-efficiency investments as a means to reduce energy consumption, and thus greenhouse gas emissions, in developing countries. Ryan reports the results of a large field experiment among energy-intensive Indian manufacturing plants that offered information and skilled labor to encourage energy-efficiency investments and practices. Treatment plants hire more skilled labor; invest small amounts in recommended energy-efficiency measures; increase physical efficiency for some systems; increase capacity utilization across the board; and invest more in other capital improvements. This suite of changes looks like modernization—a shift towards higher-skill, more capital-intensive plant production. The net effect of modernization on energy consumption is roughly zero, within the precision of my estimates, with a positive point estimate for energy use. Plants that become more efficient run more, which offsets any savings in energy. The results suggest that the rebound effect of energy use increasing in response to higher energy productivity may be high in sectors where energy and unskilled labor are easily substitutable.

Gustavo Bobonis, the University of Toronto; Mark Stabile, INSEAD; and Leonardo Tovar, the University of Toronto

Bombs and Babies: The Relationship between U.S. Navy Bombing Activity and Infant Health in Vieques, Puerto Rico

Bobonis, Stabile, and Tovar study the relationship between in utero exposure to military exercises and children's early-life health outcomes in a no-war zone. This allows them to document non-economic impacts of military activity on neonatal health outcomes. They combine monthly data on tonnage of ordnance in the context of naval exercises in Vieques, Puerto Rico, with the universe of births in Puerto Rico between 1990 and 2000; studying this setting is useful because these exercises have no negative consequences for local economic activity. The researchers find that a one standard deviation increase in exposure to bombing activity leads to a three per thousand point (70 percent) increase in extremely premature births; a three to seven per thousand point – 34 to 77 percent – increase in the incidence of congenital anomalies; and a five per thousand point increase in low APGAR scores (38 percent). The evidence is generally consistent with the channel of environmental pollution. Given the well-documented relationship between neonatal health and later life outcomes, there is reason to believe that the substantial short-term effects may have longer-term consequences for this population.

Solomon M. Hsiang, the University of California at Berkeley and NBER

Estimating Economic Damage from Climate Change in the United States

Frank A. Wolak, Stanford University and NBER

Assessing the Impact of the Diffusion of Shale Oil and Gas Technology on the Global Coal Market

A spatial equilibrium model of the world coal market is developed that accounts for coal to natural gas switching in the electricity sector in the United States and Europe, the potential for China to exercise monoposony power in its coal purchasing behavior, and the impact of increasing the western US coal export port capacity. A market equilibrium is computed as the solution to a nonlinear complementarity problem. Where possible parameters of the model are estimated econometrically. Where this is not possible the parameters are calibrated to global coal market outcomes in 2011. The model is used to assess how the shale gas boom in the United States is likely to impact global coal market outcomes for different models of Chinese coal buyers' purchasing behavior and different scenarios for the capacity of coal export terminals on the US west coast. Although reductions in US and European natural gas prices reduce coal consumption in the US and Europe, the percentage reduction in coal consumption in Europe is much less than that in the US. Increasing US west coast port capacity increases coal exports from the western US and reduces Chinese coal production. US coal prices increase which causes more coal to natural gas switching in the US, further reducing global greenhouse gas emissions. Modeling China as a monopsony buyer of coal increases the absolute magnitude of these impacts.

James E. Archsmith, the University of California at Davis; Kenneth Gillingham, Yale University and NBER; David Rapson, the University of California at Davis; and Christopher R. Knittel

Household Diversification: The Vehicle Portfolio Effect

This paper quantifies the extent to which multi-car households exhibit preferences for a diversified vehicle portfolio. Archsmith, Gillingham, Rapson, and Knittel deploy a novel identification strategy to examine how an exogenous change in the fuel economy of a kept vehicle affects a household's choice of a second vehicle purchased. This has potential implications for the relative long-run effectiveness of greenhouse gas abatement initiatives such as fuel economy standards and a price on carbon. Results indicate a strong preference for a diverse portfolio in fuel-economy. The results highlight the importance of the researchers' instrumental variables approach and the pitfalls that arise when using between-household, rather than within-household, variation. The results imply that the portfolio effect will exert a strong force that may erode a substantial portion of expected gasoline savings from higher fuel economy standards.

Maximilian Auffhammer, the University of California at Berkeley and NBER

Climate Adaptive Response Estimation (CARE): Short And Long Run Impacts Of Climate Change On Residential Electricity and Natural Gas Consumption Using Big Data

This paper proposes a simple method (Climate Adaptive Response Estimation - CARE) to parameterize the climate dose response function using residential electricity and natural gas demand for the world's seventh largest economy &mdash California. The advantage of the proposed method is that it only requires detailed information of consumption, yet does not require knowledge of what technology is installed. Using almost two billion energy bills, Auffhammer estimates spatially highly disaggregated intensive margin temperature response functions (e.g. increases in air conditioning) using daily variation in weather. In a second stage he explains variation in the slope of the dose response functions (e.g. the adoption of additional air conditioners) across space as a function of summer climate. Using 18 state of the art climate models he simulates future demand by letting households vary consumption along the intensive and extensive margin. Auffhammer shows that reductions in natural gas demand more than offset any climate driven increases in electricity consumption. He further shows that failing to account for extensive margin adjustment in electricity demand leads to a significant underestimate of the future impacts on electricity consumption.

Achyuta Adhvaryu, th eUniversity of Michigan and NBER; Prashant Bharadwaj, the University of California at San Diego and NBER; James E. Fenske, Oxford University; Anant Nyshadham, Boston College; and Richard Stanley, UNICEF

Dust and Death: Evidence from the West African Harmattan

Using two decades of data from 12 low-income countries in West Africa, Adhvaryu, Bharadwaj, Fenske, Nyshadham, and Stanley show that dust carried by harmattan trade winds increases infant and child mortality. Health investments respond to dust exposure, consistent with compensating behaviors. Despite these efforts, surviving children still exhibit negative health impacts. The researchers' data allow them to investigate differential impacts over time and across countries. They find declining impacts over time, indicating adaptation. Using national-level measures of macroeconomic conditions and health resources, they find suggestive evidence that both economic development and public health improvements have contributed to this adaptation, with health improvements playing a larger role.

Kelsey Jack, Tufts University and NBER; Seema Jayachandran, Northwestern University and NBER; and Sarojini V. Rao, the University of Chicago

Environmental Externalities and Intrahousehold Inefficiencies

When consumption generates negative externalities, the preferred policy solution is to set a price that reflects the social cost of consumption. In some cases – for example,household water and electricity use – consumption is susceptible to a second externality problem: each individual enjoys the private benefits of consumption but shares the costs with other household members, leading to overconsumption even from the household's viewpoint. Jack, Jayachandran, and Rao test the prediction that intrahousehold inefficiency dampens price sensitivity in the context of water use in Zambia, combining billing records, randomized price variation, and lab-experimental measures of intrahousehold efficiency. They find that households with above-median measures of intrahousehold efficiency have a short-run price elasticity of -0.463, while those with below-median efficiency have an elasticity of -0.147. These results suggest that the required Pigouvian price when usage is billed at the household level, yet own and other household members' consumption is difficult to observe, will need to correct both the environmental and the intrahousehold externalities. Alternative policies such as individual-level price incentives or access to real-time data on household water consumption (which would improve the enforceability of intrahousehold agreements) could also be useful.

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