Environment and Energy Economics

Members of the NBER's Environment and Energy Economics Program met March 14-15 in Stanford. Research Associates Kelsey Jack of University of California, Santa Barbara and Ryan Kellogg of University of Chicago organized the meeting. These researchers' papers were presented and discussed:

Fiona Burlig and Louis Preonas, University of Chicago, and Akshaya Jha, Carnegie Mellon University

Out-of-merit Costs and Blackouts:Evidence from the Indian Electricity Market

Peter Christensen and Ignacio Sarmiento, University of Illinois, and Christopher Timmins, Duke University and NBER

Housing Discrimination and the Pollution Exposure Gap in the United States

Neighborhood pollution exposures can have significant effects on health outcomes, disproportionately affecting minority households. Christensen, Sarmiento, and Timmins combine experimental evidence on discrimination from a correspondence design in the rental housing market with observational evidence from a panel detailing the movements of 1.9 million renter households to study the extent to which discrimination constrains the housing choices of minorities in ways that contribute to a race gap in pollution exposures. The researchers find that renters with African American and Hispanic/Latin names receive the exact same response rates to inquiries made for housing within a tight radius of plants that emit toxic pollutants (high exposure locations), while receiving 19% and 26% lower response rates at lower exposure locations in the same markets. The researchers find that African American and Hispanic/Latin renters in these markets move into high exposure neighborhoods at higher rates and move out at lower rates than similar white households, resulting in higher exposures to toxics and particularly during periods of pregnancy. These differences result in a 23% higher likelihood of in utero exposures to toxic emissions for children born in Hispanic/LatinX households and 14.4% higher likelihoods for children born in African American households.

Koichiro Ito, University of Chicago and NBER, and Shuang Zhang, University of Colorado at Boulder

Setting the Price Right: Evidence from Heating Price Reform in China

Inefficient energy pricing and the lack of incentives to conserve energy are common problems in developing countries and result in substantial allocative inefficiency. Ito and Zhang evaluate a recent major reform in the residential heating system in China that replaced a non-metered fixed payment system with a two-part tariff, called consumption-based billing. The researchers develop an event-study research design that exploits quasi-experimental variation in the staggered rollouts of the reform over ten years. Using household-level daily heating usage data before and after the reform, the researchers find that the reform induced substantial reduction in heating usage, by 37 percent reduction in four years. They also find evidence of learning. Households reduced heating usage gradually over time, with larger reduction in warmer days (i.e. days when the value of heating was relatively low) in later years. The researchers then use plant-level emission data to examine environmental benefits of the reform. The reduced heating usage was associated with 40 percent reduction in SO2 emission concentration, 26 percent in NOx concentration and 18 percent in Dust concentration. These results are used to calculate the reduction in deadweight loss that was produced by the policy. The findings provide important implications for energy policy because a growing number of developing countries are in the process of implementing consumption-based energy billing in lieu of pre-existing inefficient fixed-charge billing.

Derek Lemoine, University of Arizona and NBER

Estimating the Consequences of Climate Change from Variation in Weather (NBER Working Paper No. 25008)

Lemoine formally relates the consequences of climate change to the time series variation in weather extensively explored by recent empirical literature. Lemoine shows that whether conventional fixed effects regressions underestimate or overestimate the effect of climate on actions (such as adaptation investments) depends primarily on whether actions are intertemporal substitutes (owing to resource constraints) or intertemporal complements (owing to adjustment costs). Lemoine also derives the conditions under which fixed effects regressions can recover the marginal effect of climate change on payoffs. Lemoine shows that these conditions become less restrictive when regressions control for lags of weather and for forecasts of future weather.

David Keiser, Iowa State University, and Joseph S. Shapiro, University of California, Berkeley and NBER

Burning Waters to Crystal Springs? U.S. Water Pollution Regulation Over the Last Half Century

In the half century since the founding of the U.S. Environmental Protection Agency, the U.S. has spent nearly $4 trillion to provide cleaner rivers, lakes, and drinking water, or annual spending of 0.7 percent of U.S. GDP in most years. Yet over half of rivers and substantial shares of drinking water systems violate standards, and polls for decades have listed water pollution as Americans' number one environmental concern. Keiser and Shapiro assess the history, effectiveness, and efficiency of the Clean Water Act and Safe Water Drinking Act, and obtain four main conclusions. First, water pollution has fallen since these laws, in part due to their interventions. Second, investments made under these laws could be more cost-effective. Third, most recent studies estimate benefits of cleaning up pollution in rivers and lakes which are much less than their costs. Either these analyses systematically understate the value of these investments or these investments are inefficient. Analysis finds more positive net benefits of drinking water quality investments. Fourth, economic research and teaching on water pollution is surprisingly uncommon, as measured by samples of publications, conference presentations, or textbooks.

Cloe Garnache, University of Oslo, and Todd Guilfoos, University of Rhode Island

The Effect of Salience on Risk Perceptions and Asset Prices

Garnache and Guilfoos investigate how different forms of salience affect homeowners' natural-disaster risk perceptions. Using a unique repeat-sales dataset of real estate transactions in Southern California, they find that prices of homes newly assigned to a wildfire risk zone drop by 10.3% to 11.1% relative to homes just outside the new designation. While the risk zone assignment is discontinuous, the underlying risk is arguably continuous, suggesting the new designation triggers greater risk salience rather than greater risk. The researchers then investigate the effect of a different form of salience, namely how visual cues of natural-disaster damages affect home prices. They find that prices of homes with a view of wildfire damages are 4.2% to 5.0% lower that similar homes with no view. This effect is strongly significant only for the first year post-wildfire, when the damages are most extreme, and is therefore unlikely to be fully attributable to the visual disamenities, which recover progressively. The findings suggest that households' investment decisions respond to risk salience and thus systematically deviate from expected utility theory in a specific way.

Jonathan I. Dingel, University of Chicago and NBER; Kyle C. Meng, University of California, Santa Barbara and NBER; and Solomon M. Hsiang, University of California, Berkeley and NBER

Spatial Correlation, Trade, and Inequality: Evidence from the Global Climate (NBER Working Paper No. 25447)

Dingel, Meng, and Hsiang show that welfare inequality across a trading network is greater when neighboring locations have more similar productivities. A rise in the global spatial correlation of productivities can raise cross-country welfare dispersion by increasing the correlation between a country's productivity and its gains from trade. To causally examine this mechanism, the researchers study how annual global agricultural trade responds to exogenous changes in the spatial correlation of agricultural productivity driven by a global climatic phenomenon. As predicted, gains from trade over the last half-century were larger for more productive countries and smaller for less productive countries when agricultural productivity was more spatially correlated. In a forecasting application, end-of-century climate change projections that incorporate this general-equilibrium effect exhibit substantially greater global welfare inequality, with higher welfare losses across most of Africa.

James M. Sallee, University of California, Berkeley and NBER

Pigou Creates Losers: On the Implausibility of Achieving Pareto Improvements from Pigouvian Taxation

A Pigouvian tax imposes initial burdens by raising prices, but it generates revenue plus efficiency gains that are greater than the sum of these burdens. Sallee uses theory and data to ask when those gains can be reallocated so as to achieve a Pareto improvement. Sallee derives a necessary condition for a Pigouvian tax to create a Pareto improvement that can be tested directly with data. The condition relates the size of efficiency gains to the degree of predictability between initial burdens and variables used to determine a transfer scheme. This makes clear that compensating losers so as to achieve a Pareto improvement is fundamentally a prediction problem. The main empirical application is to a gasoline tax to correct carbon emissions, though related results are presented for other sin taxes. Results indicate that it is infeasible to create a Pareto improvement from the taxation of these goods, and moreover that plausible policies are likely to leave a large fraction of households as net losers.

Nicholas Ryan, Yale University and NBER

Contract Enforcement and Productive Efficiency: Evidence from the Bidding and Renegotiation of Power Contracts in India (NBER Working Paper No. 25547)

Weak contract enforcement may reduce the efficiency of investment in developing countries. Ryan studies how contract enforcement affects efficiency in power procurement auctions covering the largest projects in India. Ryan gathers data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to input cost shocks is widespread. Connected firms choose to index less of the value of their bids to coal prices and thereby expose themselves to coal price risk to induce renegotiation. Ryan uses a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that winning bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding with strict contract enforcement. With no renegotiation, equilibrium bids would rise to cover cost, but mark-ups relative to total contract value fall by more than half. Production costs decline modestly, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation.

Stephen P. Holland, University of North Carolina at Greensboro and NBER; Erin T. Mansur, Dartmouth College and NBER; Nicholas Muller, Carnegie Mellon University and NBER; and Andrew J. Yates, University of North Carolina at Chapel Hill

Decompositions and Policy Consequences of an Extraordinary Decline in Air Pollution from Electricity Generation (NBER Working Paper No. 25339)

Holland, Mansur, Muller, and Yates determine the change in air pollution damages from U.S. power plant emissions over 2010 to 2017. Annual damages fell from $245 billion to $133 billion over this period, with most of the decline occurring in the East. Decomposition shows that changes in emissions rates reduced damages by $63 billion, changes in generation shares reduced damages by $60 billion, and a reduction in fossil generation reduced damages by $25 billion. However, changes in damage valuations per ton of emissions increased damages by $35 billion. The researchers estimate that marginal damages declined in the East from about 9¢ per kWh in 2010 to 6¢ in 2017. This decrease is slower than the decrease in total damages. Despite little or no change in total damages in the West and Texas, marginal damages increased. The environmental benefit of electric vehicles increased so that they are now cleaner than gasoline vehicles on average, though substantial heterogeneity remains. The environmental benefit of solar panels decreased in the East but increased elsewhere.

Panle Jia Barwick and Shanjun Li, Cornell University and NBER; Liguo Lin, Shanghai University of Finance and Economics; and Eric Zou, Cornell University

The Value of Pollution Information: Evidence from China’s Air Quality Disclosure

Barwick, Li, Lin, and Zou study the 2013 sea change in pollution information availability when China rolled out a national pollution monitoring network to disclose real-time air quality in more than 300 cities. They document a surge in media mention as well as citizens' interest in pollution topics. They then show how short- and long-run pollution avoidance behavior change with better information. First, the researchers use detailed point-of-sale (POS) credit card transaction data to show that high outdoor pollution suppresses daily purchase trips, much more so when the public gained access to information. Second, they find that communities' pollution levels are better reflected in housing transactions. For example, similar apartment complexes near major polluters are sold at lowered prices post pollution disclosure. The researchers use the reduced form estimates to develop a measure of the value of pollution information.

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