Essays in Environmental Economics

Abstract

In the first paper, I examine how supporting early clean technologies affects the long-run transition away from dirty technologies. Early policy action generates immediate environmental benefits from increased adoption of available efficient products, but may result in intertemporal substitution away from later products with greater potential for reducing externalities. I examine how standards and subsidies supporting early advancements in lighting efficiency (halogens, CFLs) impacted the adoption of later products with higher efficiency (LEDs). I estimate a model of residential lighting demand, using structural methods adapted from dynamic models to capture how the market size and distribution of consumer heterogeneity depended endogenously on the history of past purchases. Counterfactual simulations suggest that delaying the implementation of standards from 2012 to 2018 would result in 36% greater LED sales over this period, while delaying the phase-out of CFL subsidies from 2012 to 2018 would result in 20% fewer LEDs sold. Across a range of specifications, I find that environmental benefits from some early policy action outweigh the environmental cost of reduced LEDs adoption; the overall environmental externality is minimized when standards are implemented in 2012 and CFL subsidies are phased-out after 2014. Sensitivity analyses around alternative technology lifetimes, externalities, and innovation responses identify conditions under which early policy intervention would be counterproductive.

The second paper, co-authored with Joe Aldy, begins with the observation that firms may make persistent errors in forecasting allowance and credit prices in real-world pollution markets. The residual uncertainty characterizing allowance and credit trading means that pollution markets may fail to deliver cost-effective abatement. This contrasts with price-based policies under which firms make investments that equate marginal abatement cost to an emission tax. We incorporate the additional cost of forecast errors under quantity-based programs into a standard Weitzman-style prices versus quantities framework. We distinguish between individual firms' uncertainty over competitors' private information and systemic uncertainty over future cost shocks. We show that a welfare-maximizing regulator would favor price instruments in response to the prospect of firm-specific forecast errors under quantity instruments, ceteris paribus, and the relative benefit of price instruments increases with forecast error variance. We discuss the role of policy design, such as incorporating price collars, in mitigating cost-inefficiencies from price forecast errors.

In the third paper, co-authored with Frank Pinter, we ask when should policies to encourage new types of products use supply-side tools, like regulations and mandates, and when should they use demand-side tools like consumer incentives. When prices are set nationally but policy varies by state, supply-side and demand-side tools are no longer equivalent. We study an important state-level supply-side policy in the early electric vehicle industry: the zero-emission vehicle mandate in California and nine other states. Focusing on the 2009--17 period, we examine two channels for policy effects: imperfect competition and endogenous product entry. Using a structural model of new vehicle pricing, demand, and product entry, we compare the mandate to a counterfactual demand-side policy that instead uses a consumer subsidy and tax. Holding fixed the regulator's stated target, electric vehicle sales in regulated states, the demand-side policy creates a weaker incentive for socially beneficial product entry and generates lower consumer and total surplus. When fewer products are introduced, producers avoid entry costs, but forego long-run benefits of entry.