Environmental and Energy Policy and the Economy

Members of NBER Environmental and Energy Policy and the Economy Program met on May 21. Research Associates Matthew Kotchen of Yale University and James H. Stock of Harvard University, and Program Director Catherine Wolfram of University of California, Berkeley organized the meeting, sponsored by the Alfred P. Sloan Foundation. These researchers' papers were presented and discussed:

Robert S. Pindyck, MIT and NBER

What We Know and Don't Know about Climate Change, and the Implications for Policy (slides)

There is a lot we know about climate change, but there is also a lot we don't know. Even if we knew how much CO2 will be emitted over the coming decades, we wouldn't know how much temperatures will rise as a result. And even if we could predict the extent of warming that will occur, we can say very little about its impact. Pindyck explains that we face considerable uncertainty over climate change and its impact, why there is so much uncertainty, and why we will continue to face uncertainty in the near future. He also explains the policy implications of climate change uncertainty. First, the uncertainty (particularly over the possibility of a catastrophic climate outcome) creates insurance value, which pushes us to earlier and stronger actions to reduce CO2 emissions. Second, uncertainty interacts with two kinds of irreversibilities. First, CO2 remains in the atmosphere for centuries, making the environmental damage from CO2 emissions irreversible, pushing us to earlier and stronger actions. Second, reducing CO2 emissions requires sunk costs, i.e., irreversible expenditures, which pushes us away from earlier actions. Both irreversibilities are inherent in climate policy, but the net effect is ambiguous.

Adele Morris and Siddhi Doshi,Brookings Institution, and Noah Kaufman, Columbia University

Revenue at Risk in Coal-Reliant Counties (slides)

This paper examines the implications of a carbon-constrained future on coal-reliant county governments in the United States. Morris, Kaufman, and Doshi review modeling projections of coal production under reference and climate policy scenarios and argue that some state and local governments face important revenue risks. Complex systems of revenue and intergovernmental transfers, along with insufficiently-detailed budget data, make it difficult to parse out just how exposed jurisdictions are to the coal industry. A look at three illustrative counties shows that coal-related revenue may fund a third or more of their budgets. When the results of regression analysis of 27 coal-reliant counties are extrapolated outside the sample to the demise of the industry, they suggest these counties could lose on average about 20 percent of their revenue. This does not account for the potential downward spiral of other revenues as the collapse of the dominant industry erodes the tax base. Coal-dependent communities have issued a variety of outstanding bonds that will mature in a time frame in which climate policy is likely. This review of illustrative bonds indicates that municipalities have not appropriately characterized their coal-related risks. Ratings agencies are only now beginning to document the hazardous exposure of some local governments to the coal industry. Climate policies can be combined with investments in coal-dependent communities to support their financial health. A logical source of funding for such investments would be the revenues from a price on carbon dioxide emissions, a necessary element of any cost-effective strategy for addressing the risks of climate change. Morris, Kaufman, and Doshi discuss how a small fraction of revenue from a federal carbon price in the United States could fund billions of dollars in annual investments in the economic development of coal-dependent communities and direct assistance to coal industry workers.

Joseph E. Aldy, Harvard University and NBER; Matthew Kotchen, Yale University and NBER; Mary F. Evans, Claremont McKenna College; Meredith Fowlie, University of California, Berkeley and NBER; Arik Levinson, Georgetown University and NBER; and Karen Palmer, Resources for the Future

Co-Benefits and Regulatory Impact Analysis: Theory and Evidence from Federal Air Quality Regulations

This paper considers the treatment of co-benefits in benefit-cost analysis of federal air quality regulations. Using a comprehensive dataset on all economically significant Clean Air Act rules issued by the EPA over the period 1997-2016, Aldy, Kotchen, Evans, Fowlie, Levinson, and Palmer show that (1) co-benefits make up a significant share of the monetized benefits; (2) among the categories of co-benefits, those associated with reductions in fine PM are the most significant; and (3) co-benefits have been pivotal to the quantified net benefit calculation in the majority of cases. Motivated by these trends, the researchers develop a simple conceptual framework that illustrates a critical point: co-benefits are simply a semantic category of benefits that should be included in benefit-cost analyses. Aldy, Kotchen, Evans, Fowlie, Levinson, and Palmer also address common concerns about whether the inclusion of co-benefits is problematic because of alternative regulatory approaches that may be more cost effective and the possibility for double counting.

Tatyana Deryugina, Nolan H. Miller, David Molitor, and Julian Reif, University of Illinois at Urbana-Champaign and NBER

Geographic and Socioeconomic Heterogeneity in the Benefits of Reducing Air Pollution in the United States

Policies aimed at reducing the harmful effects of air pollution exposure typically focus on areas with high levels of pollution. However, if a population's vulnerability to air pollution is imperfectly correlated with current pollution levels, then this approach to air quality regulation may not efficiently target pollution reduction efforts. Deryugina, Miller, Molitor, and Reif examine the geographic and socioeconomic determinants of vulnerability to dying from acute exposure to fine particulate matter (PM2.5) pollution. They find that there is substantial local and regional variability in the share of individuals who are vulnerable to pollution both at the county and ZIP code level. Vulnerability tends to be negatively related to health and socioeconomic status. Surprisingly, the researchers find that vulnerability is also negatively related to an area's average PM2.5 pollution level, suggesting that basing air quality regulation only on current pollution levels may fail to effectively target regions with the most to gain by reducing exposure.

Oliver Browne, The Brattle Group; Ludovica Gazze, University of Chicago; and Michael Greenstone, University of Chicago and NBER

Do Conservation Policies Work? Evidence from Residential Water Use

In response to the historic 2011-2017 California drought, local governments enacted a raft of conservation policies and yet little is known about which ones explain the sharp decline in residential water consumption. To answer this question, this paper uses a novel data set that provides hourly water consumption data for 82,300 households in Fresno, California where water consumption declined by nearly a third and has three main findings. First, Browne, Gazze, and Greenstone estimate the price elasticity of demand for water to be 0.20 for marginal rates and 0.44 for average rates. Second, reducing the number of days where outdoor watering is allowable from 3 to 2 substantially decreases aggregate water use, despite the availability of opportunities to substitute between permitted and non-permitted hours, days, and times of year. Third, "bully pulpit" pronouncements about the water crisis increased public awareness of drought conditions but did not contribute substantially to water savings. Overall, higher water prices explain 49% of the changes in residential water use observed during researchers' sample period in Fresno and reductions in the number of days when outdoor watering is allowable explain 40-47% of the changes in water use. However, the absence of experimental or quasi-experimental variation in these policies means that Browne, Gazze, and Greenstone interpret this associational evidence cautiously.

Shaikh M. Eskander, Sam Fankhauser, and Joana Setzer, London School of Economics

Lessons from Global Trends in Climate Change Legislation and Litigation (slides)

There is no country in the world that does not have at least one law or policy dealing with climate change. The most prolific countries have well over 20, and globally there are 1,800 such laws. Some of them are executive orders or policies issued by governments, others are legislative acts passed by parliament. The judiciary has been involved in 1,500 court cases that concern climate change (over 1,100 of which in the US). Eskander, Fankhauser, and Setzer use Climate Change Laws of the World (CCLW), a publicly accessible database, to analyze patterns and trends in climate change legislation and litigation over the past 30 years. The data reveal that global legislative activity peaked around 2008-13, well before the Paris Agreement. Accounting for government effectiveness and the length of time laws have been in effect, the UK and South Korea are the most comprehensive legislators among the G20 and Spain is within the OECD. Climate change legislation is less of a partisan issue than is commonly assumed: the number of climate laws passed by governments of the left, center and right is roughly proportional to their time in office. The researchers also find that legislative activity decreases in times of economic difficulty. Where courts have got involved, judges outside the US have ruled in favor of enhanced climate protection in 53 percent of cases (US judges are more likely to rule against climate protection).

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us