Environmental and Energy Economics

March 9 and 10, 2012
Don Fullerton and Nolan H. Miller of the University of Illinois, Organizers

Garth Heutel, University of North Carolina, Greensboro and NBER, and Christopher J. Ruhm, University of Virginia and NBER

Air Pollution and Procyclical Mortality

Prior research shows that mortality rates increase during economic booms and decrease during economic busts. The procyclicality of environmental risks is a possible mechanism for this pattern, but almost no analysis of this relationship has been conducted. Heutel and Ruhm take a first step by investigating the contribution of pollution to the procyclicality of deaths. They combine state-level data on overall, cause-specific, and age-specific mortality rates with state-level measures of two types of ambient pollution concentrations. After controlling for other demographic variables, state fixed-effects and general year effects, they find a significant positive correlation between carbon monoxide (CO) concentrations and mortality rates. Controlling for CO and emissions of particulate matter (PM10) attenuates the relationship between mortality and business cycles, measured by the unemployment rate, by more than half and renders it statistically insignificant. The attenuation is particularly large (more than 60 percent), although imprecisely measured, for fatalities from respiratory causes, but the reduction in estimated effects is also frequently substantial for other causes of death and for the mortality of persons who are not of prime working age.

Jesse K. Antilla-Hughes, Columbia University, and Solomon M. Hsiang, Princeton University

Destruction, Disinvestment, and Death: Economic and Human Losses Following Environmental Disaster

The direct physical damage caused by environmental disasters is straightforward to document and is often the focus of media and government attention, but addressing disasters' indirect effects remains difficult because they are challenging to observe. Antilla-Hughes and Hsiang exploit annual variation in the incidence of typhoons (WestPacific hurricanes) to identify the effect of environmental disaster on economic and health outcomes in Filipino households. They find that the Philippines' typhoon climate causes large losses to households' economic well being, destroying durable assets and depressing incomes in the wake of storms. Household income losses translate directly into expenditure reductions, which are achieved in part through disinvestments in health and human capital. The authors also observe substantially increased female infant mortality in the years following storm exposure. Striking similarities in the structure of these mortality and economic responses, along multiple dimensions, implicates the deterioration of economic conditions and subsequent disinvestments as the cause of mortality among female infants. Bolstering this hypothesis, they find that mortality is highest in households where infant daughters face the greatest competition with other children for resources, particularly with older brothers. The researchers estimate that these delayed deaths among female infants outnumber officially reported typhoon deaths in the general populace by a factor of fifteen.

Christopher R. Knittel, MIT and NBER, and Ryan Sandler, University of California at Davis

Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation (NBER Working Paper No. 17390)

Efforts to reduce greenhouse gas emissions from transportation in the United States have relied on Corporate Average Fuel Economy (CAFE) Standards and Renewable Fuel Standards (RFS). Economists often argue that these policies are inefficient relative to carbon pricing because they ignore existing vehicles and do not adequately reduce the incentive to drive. Knittel and Sandler present evidence that the net social costs of carbon pricing are significantly less than previous thought. The bias arises from the fact that the demand elasticity for miles traveled varies systematically with vehicle emissions: dirtier vehicles are more responsive to changes in gasoline prices. This is true for all four emissions for which the authors have data-nitrogen oxides, carbon monoxide, hydrocarbon, and greenhouse gases—as well as weight. This reduces the net social costs associated with carbon pricing through increasing the co-benefits. Accounting for this heterogeneity implies that the welfare losses from a $1.00 gas tax, or a $110 per ton of CO2 tax, are negative over the period of 1998 to 2008 even when one ignores the climate change benefits from the tax. Co-benefits increase by more than double relative to ignoring the heterogeneity that is documented here. In addition, accounting for this heterogeneity raises the optimal gas tax associated with local pollution, as calculated by Parry and Small (2005), by as much as 99 percent. While this empirical setting is California, the authors present evidence that the effects may be larger for the rest of the United States.

Ester Duflo and Michael Greenstone, MIT and NBER, and Rema Hanna, Harvard University

Up in Smoke: The Long-Run Impact of Improved Cooking Stoves (NBER Working Paper No. 18033)

Conventional wisdom suggests that it is possible to reduce exposure to indoor air pollution, improve health outcomes, and decrease greenhouse gas emissions in the rural areas of developing countries by introducing improved cooking stoves. This belief is largely supported by observational field studies and by engineering or laboratory experiments. However, Duflo, Greenstone, and Hanna provide new evidence to the contrary from a randomized control trial conducted in rural Orissa, India (one of the poorest places in that country) on the benefits of a commonly used and improved stove that, according to laboratory tests, reduces indoor air pollution and requires less fuel. The researchers track households for up to four years after receiving the stove and find a meaningful reduction in smoke inhalation in the first year, but no effect over longer time horizons. Nor do they find evidence of improvements in lung functioning or health, or of a change in fuel consumption (and thus, presumably, greenhouse gas emissions). The difference between the laboratory and the field findings appears to be the result of households' revealed low valuation of the stoves. Households failed to use the stoves regularly or appropriately, did not make the necessary investments to maintain them properly, and their usage rates ultimately declined further over time. More broadly, this study underscores the need to test environmental and health technologies in real-world settings where behavior may temper impacts, and to test them over a long enough horizon to understand how this behavioral effect evolves over time.

Prashant Bharadwaj and Joshua S. Graff Zivin, University of California, San Diego, and Christopher Neilson, Yale University

Temperature and Human Capital Formation

Bharadwaj, Graff Zivin, and Neilson provide evidence that in utero exposure to warm environmental temperatures has long-lasting impacts on human capital formation. In particular, they find that exposure to warmer temperatures in the third trimester of pregnancy leads to diminished performance in school and on standardized tests 6 to 12 years later. While much smaller in magnitude, there is also a beneficial impact of warmer temperatures in the first trimester, under certain model specifications. These effects are not driven by birth weight, and parents appear to do little to alter their trajectory. Thus, rising temperatures under climate change may significantly decrease labor force quality in the future. These results may also provide insights into the mechanisms underpinning the negative association in the macroeconomic literature between temperature and economic prosperity.

Hunt Allcott, New York University and NBER; Sendhil Mullainathan, Harvard University and NBER; and Dmitry Taubinsky, Harvard University

Externalities, Internalities, and the Targeting of Energy Policy

Allcott, Mullainathan, and Taubinsky use a theoretical model and empirically-calibrated simulations of the automobile market to show how the traditional logic of Pigouvian taxation can change when consumers are not attentive to energy costs. With inattention, there is a "Triple Dividend" from externality taxes: aside from reducing the provision of public "bads" and generating government revenue, they also reduce allocative inefficiencies caused by underinvestment in energy efficient capital stock. While Pigouvian taxes are clearly the preferred policy mechanism when externalities are the only market failure, inattention provides an "Internality Rationale" for alternative policies, such as subsidies, that reduce the relative price of energy efficient durable goods. However, heterogeneity in the way consumers optimize or mis-optimize means that non-discriminatory taxes and subsidies are blunt instruments for addressing mis-optimization: any given policy is too strong for some consumers and too weak for others. Thus the authors discuss "Behavioral Targeting": the use of mechanisms such as tagging, screening, and nudges that preferentially affect mis-optimizers. They also formally define a class of mechanisms called "Nudge-Inducing Policies," which are taxes specifically designed to encourage firms to use advertising, information provision, retail sales interactions, and other nudges to debias mis-optimizing consumers.

Harrison Fell, Resources for the Future; Ian Mackenzie, ETH Zürich; and William A. Pizer, Duke University and NBER

Prices versus Quantities versus Bankable Quantities (NBER Working Paper No. 17878)

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. Fell, MacKenzie, and Pizer address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (for example,, borrowing). They show conditions under which banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, they find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.

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