Author: Cristina Bentley

John Voorheis

U.S. Census Bureau
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“Pollution and the Intergenerational Transmission of Human Capital: Evidence from the 1970 Clean Air Act”

Abstract: How do parental endowments shape the economic prospects of their children? Using a newly constructed dataset from the U.S. Census Bureau linking survey, Census and administrative records, we evaluate the effect of early childhood pollution exposure on the long-run effects of the individuals directly affected, as well as the persistence of these effects across generations – exploring the effects of in-utero pollution exposure on the children of those that were in utero exposed. We exploit variation in particulate matter, which sharply dropped following the enactment of the 1970 Clean Air Act Amendments, which we argue allows us to identify these effects as causal. We find that increased early life exposure to particulate matter is associated with significant reductions in the later life earnings of affected individuals, as well as changes in family structure, through an increased likelihood of divorce. In addition, we find evidence that the consequences of this exposure are transmitted across generations. The children of those affected by increased in-utero pollution exposure are less likely to attend college and experience lower earnings. Preliminary evidence on the drivers of the second generation effects point to the importance of economic, as opposed to genetic, channels, highlighting the role that policy could play in equalizing opportunities.

Stephen Polasky

University of Minnesota
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Gross Ecosystem Product for Sustainable Development

Abstract: China is developing and pilot-testing a new measure of ecological performance, Gross Ecosystem Product (GEP), as a guide in securing the well-being of people and nature.  The aim of GEP accounting is to help reveal the contribution of ecosystems to society; show the ecological connections among regions (e.g., between suppliers and beneficiaries of ecosystem services such as flood control or water purification); inform appropriate compensation from beneficiaries to suppliers; serve as a performance metric for government officials; and otherwise inform government policy and investment.  GEP will be reported alongside Gross Domestic Product (GDP). Around the world, there is widespread recognition of the need to move beyond GDP for more complete performance measures of the ecological, economic, and social systems supporting human wellbeing (e.g., Stiglitz et al. 2010, UN Sustainable Development Goals 2015). There are ongoing efforts to provide more complete metrics, including the System of Environmental-Economic Accounting (UN 2012, 2013), Wealth Accounting and Valuation of Ecosystem Services (WAVES 2017), Inclusive Wealth (e.g., Arrow et al. 2012, World Bank 2011, UNU 2014), and the Human Development Index (UNDP 1990). But to date these efforts receive far less attention than GDP.  China’s adoption of GEP could put ecological information on a par with economic information in one of the world’s most influential countries.

Lars Hansen

University of Chicago
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Joint with the Economics Department

[Note Time & Location: 648 Evans Hall, 4:10-5:30pm]

“Pricing Uncertainty Induced by Climate Change”

Abstract: Climate science documents uncertainty induced by different emission scenarios, alternative models, and ambiguous physical interactions. Moreover, for some purposes, it constructs tractable approximations to initially complex models. To engage in credible policy analysis requires that we acknowledge and confront the limits to our understanding of dynamic mechanisms by which human inputs impact the climate.  Our research stresses limits to our understanding, with particular focus on the channel from emissions to atmospheric concentration and the channel from concentration to temperature. Even in the most recently developed Atmospheric Ocean General Circulation Models, there is wide variation across models in key policy parameters produced by such models for the same amount of anthropogenic forcing. This variation persists when considering impacts for a wide range of time scales, including shorter time scales that are more typical in economic investigations. We find it productive to pose hypothetical social planning problems and embrace recent advances in decision theory designed to confront uncertainty. The decision problems allow us to assess more formally the consequences of uncertainty.  Especially for problems of this nature, we find it important to think of uncertainty as broadly conceived to include risk within a given model, ambiguity across models and potential model misspecification.  We draw on asset pricing insights to understand better the consequences of climate impacts that depend on the horizon to the adverse outcomes might be realized.  We show the potential importance of both state dependence and horizon dependence in marginal valuations of uncertainty.  Because our analysis acknowledges the limits to our knowledge, it implies specific forms of caution but not inaction.

Ram Fishman

Tel Aviv University
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“Can Smallholder Farmers Adapt to Water Scarcity? Evidence from Karnataka, India.”

Kenneth Gillingham

Yale University
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“Experimental Evidence on the Effect of Information and Pricing on Residential Electricity Consumption”

Abstract: Residential electricity prices do not generally respond to wholesale prices and thus are disconnected from the marginal cost of generation. This study examines a field experiment in Texas that includes both pricing and informational interventions to encourage energy conservation during summer peak load days when the marginal cost of generation is the highest. Using data at the appliance-minute-level, we estimate a price elasticity of electricity demand of -0.17, and find that over 60 percent of this response can be attributed to air conditioning. Conversely, we find neither passive nor active information provision results in reduced electricity consumption during the peak load hours of typical peak summer days. By disentangling the price elasticity at the appliance-level, these results show that behavior changes are limited to a few appliances, demonstrating the mechanisms underlying the consumer response to electricity prices.

Ryan Kellogg

University of Chicago
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“Crude by Rail, Option Value, and Pipeline Investment”

Abstract: The recent large-scale use of railroads to transport crude oil out of newly discovered shale formations has no recent precedent in the U.S. oil industry. This paper addresses the question of whether crude-by-rail is simply a transient phenomenon, owing to delays in pipeline construction, or whether it will be a durable presence in the industry by reducing investment in pipeline infrastructure. We develop a model of crude oil transportation that highlights how railroads generate option value by: (1) giving shippers the ability to flexibly increase or decrease volumes shipped in response to price shocks; and (2) allowing shippers to opportunistically send oil to multiple destinations. In contrast, pipelines have low amortized costs but lock shippers into debtlike ship-or-pay contracts to a single destination. We calibrate this model to the recently constructed Dakota Access Pipeline and find that the elasticity of pipeline capacity to railroad transportation costs lies between 0.24 and 0.61, depending on parameters such as the upstream oil supply elasticity. These values are likely conservative because they neglect economies of scale in pipeline construction and the presence of cost-saving contracting in rail. Our results imply that crude-by-rail is an economically significant long-run substitute for pipeline transportation and that regulatory policies targeting environmental and accident externalities from rail transportation would likely substantially affect pipeline investments. Full Paper

Robin Burgess

London School of Economics and Political Science
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Title: “Do Agents Internalize the Environmental Costs They Impose on Others? Evidence from 100,000 Forest Fires in Indonesia” (Joint with Clare Balboni, LSE and Ben Olken, MIT)

Abstract: Negative environmental externalities in the form of pollution, degradation of natural resources and greenhouse gas emissions are highly prevalent in developing countries and impose large costs on resident populations. Private benefits are often small relative to social costs and these externality producing actions are often illegal or highly regulated. A central question in environmental economics therefore concerns the degree to which agents internalize the costs that they impose on others. To study this we construct a novel data set of over 100,000 forest fires in Indonesia, in which we link burning areas over time and space to determine where each fire started and where it spread. These forest fires run out of control, and in 2015 CO2 emissions from fires in Indonesia exceeded those from all sources in the US. Consistent with fire setting carrying private benefits we find that fires are more likely to be set in areas following deforestation where land is being converted to plantations. By mapping land types around ignition points, and using temporal variation in wind speeds (which influence the risk that fires spread), we show that agents partially respond to costs. They are less likely to set fires and more likely to contain fire spread when the cost of fire spread is higher. On net we estimate that fires would be halved if the area at risk for fire spread was entirely within the same property owner as the ignition point. To study how public and private regulation might be play a role in bringing private and social costs into greater alignment we examine both how the incidence of government sanctions for starting fires corresponds with fire setting behavior and how membership of the Roundtable on Sustainable Palm Oil (RSPO) affects the propensity to set forest fires.

Tomomichi Amano

Columbia University
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Title: “Ratcheting, Competition, and the Diffusion of Technological Change: The Case of Televisions under an Energy Efficiency Program”

Abstract: The study of the diffusion of innovation and technological change enjoys a long tradition in marketing and often places an emphasis on the role of consumer adoption. Complementing this process of diffusion are firms, which differentiate in the extent to which they provision technological change in their products. In markets with societal implications or externalities, policy is implemented to avoid the under provision of innovation. Firms have clear incentives to engage in strategic behavior in such markets because policymakers use market outcomes as a benchmark in designing regulation. This study examines a unique energy efficiency standard for television sets, under which future minimum efficiency standards are explicitly a function of current product offerings. The setting illustrates firms’ dual incentives at work: Depending on the competitive environment, they have strategic incentives to both ratchet up, and ratchet down, the quality of their product offerings in order to influence future standards. These incentives affect the pace at which innovation reaches consumers. I develop and estimate a structural model of product entry and endogenous regulation to illustrate how such dynamic standards affect product release decisions, consumer purchases, and the competitive environment. My analysis provides evidence that firms are more likely to ratchet down quality when they have similar cost structures or when the market is concentrated.

Judson Boomhower

University of California, San Diego
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Title: “Moral Hazard, Forest Fires, and Adaptation to Climate Change”

Abstract: Many important adaptive responses to climate change will occur through government investments, as opposed to private market transactions.  Government programs and investments in infrastructure, public health, national security, scientific research, and emergency response can lessen the costs of climate change.  At the same time, these large public investments raise basic public economics questions about moral hazard, distributional impacts, and allocative efficiency.  We examine these questions in the context of wildland fires in the western United States.  The frequency and severity of wildfires are increasing due to climate change. The federal and state governments now spend billions of dollars each year on wildland firefighting.  This paper considers these expenditures as an in-kind benefit to homeowners in high fire-risk areas.  Using historical firefighting data and parcel-level data on the universe of single family homes in the western U.S., we estimate the causal impact of nearby private homes on federal firefighting expenditures.  We then use those estimates to calculate the implicit transfer to homeowners due to fire protection spending that is devoted to protecting homes.  Finally, we apply simple spatial equilibrium reasoning to quantify potential distortions in new residential construction due to moral hazard, and to explore a policy counterfactual where developers pay a fee equal to the expected net present value of fire protection costs at the time of initial home construction.  We find that residential development dramatically increases fire suppression costs, and that federal firefighting efforts represent a large transfer of federal revenues to a few landowners in high-risk, low-density places.  For our highest-cost categories of homes, the net present value of fire suppression costs exceeds 5–10% of total property value.

Mar Reguant

Northwestern University
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Title: “Measuring Leakage Risk” (joint with Meredith Fowlie)

Abstract: When a policy regulating greenhouse gas emissions applies to only a subset of emitting sources, a policy-induced shift in economic activity to unregulated sources can substantially undermine policy effectiveness via emissions “leakage”. Output-based rebating of compliance costs has emerged as a preferred approach to mitigating this leakage risk. Output-based rebates, which act as a production subsidy, have potentially significant implications for both economic efficiency and the distribution of policy impacts. It is therefore important to judiciously target these subsidies to those industries truly at leakage risk. We provide a theoretically sound basis for deriving industry-specific, output-based subsidies under different policy objective functions. We show how the optimal industry-specific subsidies depend on both emissions intensity and the responsiveness of trade flows to policy-induced changes in domestic production. Using rich transaction and firm-level data from the U.S. Census, we calibrate industry-specific, output-based subsidies for manufacturing sectors in the United States. We assess the efficiency and distributional implications of implementing a domestic carbon policy with and without these leakage mitigation provisions.