Environmental and Energy Policy and the Economy

Members of the NBER's Environmental and Energy Policy and the Economy Program met May 16 in Washington DC. 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:

Antonio Bento, University of Southern California and NBER; Mark R. Jacobsen, University of California, San Diego and NBER; Christopher R. Knittel, MIT and NBER; and Arthur van Benthem, University of Pennsylvania and NBER

Estimating the Costs and Benefits of Fuel Economy Standards

Bento, Jacobsen, Knittel, and van Benthem develop a tractable analytical model to examine the welfare effects of the cost and benefits of fuel-economy standards, and apply it to examine the recent proposal to rollback fuel-economy standards by the Trump Administration. The researchers first focus on an overly simplified model that only considers the new-car market, and use this model to introduce three key channels of adjustments: First, the fuel-economy effect, defined by the direct welfare gain (or loss) from the marginal tightening of the standard. Whether this effect generates a source of welfare gain or loss depends on agents' valuations of the lifetime savings resulting from a higher standard. Second, the mileage effect, which isolates the welfare loss resulting from the value of the externalities associated from increased driving, since the cost per mile driven declines with the tighter standard. Third, the gasoline market effect, which isolates the welfare gain from reduced externalities related to fuel consumption.

Robert Stavins, Harvard University and NBER

The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis (slides)

There is widespread agreement among economists - and a diverse set of other policy analysts - that at least in the long run, an economy-wide carbon pricing system will be an essential element of any national policy that can achieve meaningful reductions of CO2 emissions cost-effectively in the United States. There is less agreement, however, among economists and others in the policy community regarding the choice of specific carbon-pricing policy instrument, with some supporting carbon taxes and others favoring cap-and-trade mechanisms. This prompts two important questions. Which - if either - of the two major approaches to carbon pricing is superior in terms of relevant criteria, including but not limited to efficiency, cost-effectiveness, and distributional equity? And which of the two approaches is more likely to be adopted in the future in the United States? This paper addresses these questions by drawing on both normative and positive theories of policy instrument choice as they apply to U.S. climate change policy, and draws extensively on relevant empirical evidence. In this paper, Stavins concludes with a look at the path ahead, including an assessment of how the two carbonpricing instruments can be made more politically acceptable.

Caroline Flammer, Boston University

Green Bonds: Effectiveness and Implications for Public Policy (slides)

This paper studies green bonds, a relatively new instrument in sustainable finance. Flammer first describes the market for green bonds and characterize the "green bond boom" witnessed in recent years. Second, using firm-level data on green bonds issued by public companies, she examines companies' financial and environmental performance following the issuance of green bonds. She finds that the stock market responds positively to the announcement of green bond issues. Moreover, Flammer documents a significant increase in environmental performance, suggesting that green bonds are effective in improving companies' environmental footprint. These findings are only significant for green bonds that are certified by independent third parties, suggesting that certification is an important governance mechanism in the green bond market. Flammer concludes by discussing potential implications for public policy.

Lucas W. Davis and James M. Sallee, University of California, Berkeley and NBER

Should Electric Vehicle Drivers Pay a Mileage Tax?

In many countries the revenue from gasoline taxes is used to fund highways and other transportation infrastructure. As the number of electric vehicles on the road increases, this raises questions about the effectiveness and equity of this financing mechanism. In this paper, Davis and Sallee ask whether electric vehicle drivers should pay a mileage tax. Though the gasoline tax has been traditionally viewed as a benefits tax, the researchers take instead the perspective of economic efficiency. They derive a condition for the optimal electric vehicle mileage tax that highlights a key trade-off. On the one hand, there are externalities from driving including traffic congestion and accidents that imply a mileage tax is efficient. On the other hand, gasoline tends to be underpriced, so a low (or even negative) mileage tax might be justified to encourage substitution away from gasoline-powered vehicles. Davis and Sallee then turn to an empirical analysis aimed at better understanding the current policy landscape for electric vehicles in the United States. Using newly-available nationally-representative microdata they calculate that electric vehicles have reduced gasoline tax revenues by $250 million annually. Davis and Sallee show that the foregone tax revenue is highly concentrated in a handful of states and is highly regressive, as most electric vehicles are driven by high-income households, and they discuss how this motivates and informs optimal policy.

Nicholas Muller, Carnegie Mellon University and NBER

Long-Run Environmental Accounting in the U.S. Economy (slides)

In this paper, Muller estimates an augmented measure of national output inclusive of environmental pollution damage in the United States economy over a 60-year period. The paper reports two primary findings. First, air pollution intensity declined precipitously from the 1950s to the modern era. Air pollution damage comprised roughly 30 percent of output in the post WWII economy, declining to under 10 percent in 2016. Second, accounting for pollution damage significantly affects growth rates. Prior to the passage of the Clean Air Act in 1970, GDP outpaced Environmentally-Adjusted Value Added (EVA), defined as GDP less air pollution damage. Following passage of the Act, EVA grew more rapidly than GDP. Macroeconomic and environmental policies, as well as the business cycle, appreciably affect damages and EVA growth.

Marc A. C. Hafstead, Resources for the Future, and Roberton C. Williams III, University of Maryland and NBER

Jobs and Environmental Regulation (slides)

Political debates around environmental regulation often center around the effect of policy on jobs. Opponents decry the "job-killing" EPA and proponents point to "green jobs" as a positive policy outcome. And beyond the political debates, Congress requires the EPA to evaluate "potential losses or shifts of employment" that regulations under the Clean Air Act may cause. Yet there is a sharp disconnect between the political importance of the jobs question and the limited research on job effects of policy and general skepticism in the academic literature about the importance of those job effects for the costs and benefits of environmental regulation. In this paper, Hafstead and Williams discuss how the existing research on jobs and environmental regulations often falls short in evaluating these questions and consider recent new work that has attempted to address these problems. They provide an intuitive discussion of key questions for how job effects should enter into economic analysis of regulations. And, using an economic model from Hafstead, Williams, and Chen (2018), they evaluate a range of environmental regulations in both the short and long-run to develop a set of key stylized facts related to jobs and environmental regulations and to identify the key questions that current models can't yet answer well.

NBER Videos

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

Contact Us