Research

Working Paper
California’s Greenhouse Gas (GHG) cap-and-trade program is a key element of the suite of policies the State has adopted to achieve its climate policy goals. The passage of AB 398 (California Global Warming Solutions Act of 2006: market-based compliance mechanisms) extended the use of the cap-and-trade program for the 2021-2030 period, while also specifying modifications of the program’s “cost containment” structure and directing CARB to “[e]valuate and address concerns related to overallocation in [ARB’s] determination of the allowances available for years 2021 to 2030.” The changes being considered by CARB will not only affect the program’s stringency, but also its performance by affecting the ability of the “cost containment” structure to mitigate allowance price volatility and the risk of suddenly escalating allowance prices. We address key design issues that were identified by the legislature in AB 398 and have been identified by CARB in its “Preliminary Concepts” white paper, including: (1) Price levels for the Price Ceiling and Price Containment Points; (2) Allocation of allowances between the auction budgets, Price Containment Points, and Price Ceiling; (3) “Overallocation” of GHG allowances; and (4) the program’s administrative and operational rules, such as procedures for distributing allowances to the market from the Price Ceiling or Price Containment Points, procedures for using allowances once distributed, and banking rules.
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2018
Narayanamurti, Venkatsh, and Jeffrey Y. Tsao. 2018. “Nurturing Transformative U.S. Energy Research: Two Guiding Principles.” MRS Energy & Sustainability 5 (10): 1-8. Abstract
Energy research is critical to continuing advances in human productivity and welfare. In this Commentary, we raise for debate and discussion what in our view is a growing mis-control and mis-protection of U.S. energy research. This flawed approach originates in natural human tendencies exacerbated by an historical misunderstanding of research and development, science and technology, and the relationships between them. We outline the origin of the mis-control and mis-protection, and propose two guiding principles to mitigate them and instead nurture research: (i) focus on people, not projects; and (ii) culturally insulate research from development, but not science from technology. Our hope is to introduce these principles into the discourse now, so they can help guide policy changes in U.S. energy research and development that are currently being driven by powerful geopolitical winds.
Greenstone, Michael, Rohini Pande, Anant Sudarshan, and Santosh Harish. 2018. A Roadmap Towards Cleaning India’s Air: Evidence-Based Recommendations for More Effective Environmental Regulations. EPIC India and Harvard Kennedy School, Evidence for Policy Design. Publisher's Version Abstract
More than 660 million Indians live in areas that exceed the Indian National Ambient Air Quality Standard (NAAQS) for fine particulate (PM2.5) pollution. Our research suggests that if India were to meet its own standards, life expectancy would increase by more than one year on average. Moreover, if India were to meet the WHO’s air quality standard, its people would live about four years longer on average. The economic costs of pollution, through its impact on health care expenditures and workforce productivity, will be significant. Ascribing a monetary value to all of the damages created by pollution is difficult, but an estimate from the Organisation for Economic Co-operation and Development (OECD) suggests that ambient air pollution alone may cost India more than 0.5 trillion dollars per year (OECD 2014).
Electric vehicles (EVs) have advanced significantly this decade, owing in part to decreasing battery costs. Yet EVs remain more costly than gasoline fueled vehicles over their useful life. This paper analyzes the additional advances that will be needed, if electric vehicles are to significantly penetrate the passenger vehicle fleet.
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Bailing out uneconomic power plants will do nothing to improve cyber security for the US energy sector or the subsidized plants themselves.
Ford, Michael J., and Daniel P. Schrag. 2018. “A tortoise approach for US nuclear research and development.” Nature Energy, 1. Publisher's Version Abstract
In Aesop’s fable, a swift hare races with a deliberate tortoise. In the end, the tortoise wins by taking a slow and steady approach. We argue that, given the economic constraints on US deployment of nuclear power, a ‘tortoise strategy’ is more prudent for US government nuclear R&D efforts.
Aldy, Joseph E. 2018. “Policy Surveillance Its Role in Monitoring, Reporting, Evaluating, and Learning.” Governing Climate Change. Cambridge University Press.
Reinhart, Carmen M., and Vincent Reinhart. 2018. “Are Oil Prices Heading for Another Spike?”. Publisher's Version Abstract
The decline in the dollar’s exchange rate seems to have gathered momentum, in part because the person who has his signature on US currency, Treasury Secretary Steve Mnuchin, seems unperturbed by its weakness. If it continues, will energy costs spiral upward?
On December 19, 2017, the government of China announced that it is commencing development of a nationwide CO2 trading system, that when launched will become the world’s largest carbon trading system, annually covering about 3.5 billion tons of CO2 emissions in China’s electric power sector. That approaches twice the size of what is currently the … Continue reading "What Should We Make of China’s Announcement of a National CO2 Trading System?"
Mohlin, Kristina, Jonathan R. Camuzeaux, Adrian Muller, Marius Schneider, and Gernot Wagner. 2018. “Factoring in the forgotten role of renewables in CO2 emission trends using decomposition analysis.” Energy Policy 116: 290-296. Publisher's Version Abstract
This paper introduces an approach for separately quantifying the contributions from renewables in decomposition analysis. So far, decomposition analyses of the drivers of national CO2 emissions have typically considered the combined energy mix as an explanatory factor without an explicit consideration or separation of renewables. As the cost of renewables continues to decrease, it becomes increasingly relevant to track their role in CO2 emission trends. Index decomposition analysis, in particular, provides a simple approach for doing so using publicly available data. We look to the U.S. as a case study, highlighting differences with the more detailed but also more complex structural decomposition analysis. Between 2007 and 2013, U.S. CO2 emissions decreased by around 10%—a decline not seen since the oil crisis of 1979. Prior analyses have identified the shale gas boom and the economic recession as the main explanatory factors. However, by decomposing the fuel mix effect, we conclude that renewables played an equally important role as natural gas in reducing CO2 emissions between 2007 and 2013: renewables decreased total emissions by 2.3–3.3%, roughly matching the 2.5–3.6% contribution from the shift to natural gas, compared with 0.6–1.5% for nuclear energy.
2017
Daniel, Kent D., Robert B. Litterman, and Gernot Wagner. 2017. “Applying Asset Pricing Theory to Calibrate the Price of Climate Risk.” NBER, 22795. Abstract
Pricing greenhouse gas emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. The optimal carbon dioxide (CO2) price, thus, is based on society’s willingness to substitute consumption across time and across uncertain states of nature. Standard constant relative risk aversion preference specifications conflate the two. Moreover, they are inconsistent with observed asset valuations, based on a large body of work in macroeconomics and finance. This literature has developed a richer set of preferences that are more consistent with asset price behavior and separate risk across time and across states of nature. In this paper, we explore the implications of these richer preference specifications for the optimal CO2 price. We develop the EZ-Climate model, a simple discrete-time optimization model in which the representative agent has an Epstein-Zin preference specification, and in which uncertainty about the effect of CO2 emissions on global temperature and on eventual damages is gradually resolved over time. We embed a number of features including potential tail risk, exogenous and endogenous technological change, and backstop technologies. The EZ-Climate model suggests a high optimal carbon price today that is expected to decline over time as uncertainty about the damages is resolved. It also points to the importance of backstop technologies and to very large deadweight costs of delay. We decompose the optimal carbon price into two components: expected discounted damages and the risk premium. JEL code: D81, G11, Q54.
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Meckling, Jonas, Thomas Sterner, and Gernot Wagner. 2017. “Policy sequencing toward decarbonization.” Nature Energy 2. Abstract
Many economists have long held that carbon pricing—either through a carbon tax or cap-and-trade—is the most cost-effective way to decarbonize energy systems, along with subsidies for basic research and development. Meanwhile, green innovation and industrial policies aimed at fostering low-carbon energy technologies have proliferated widely. Most of these predate direct carbon pricing. Low-carbon leaders such as California and the European Union (EU) have followed a distinct policy sequence that helps overcome some of the political challenges facing low-carbon policy by building economic interest groups in support of decarbonization and reducing the cost of technologies required for emissions reductions. However, while politically effective, this policy pathway faces significant challenges to environmental and cost effectiveness, including excess rent capture and lock-in. Here we discuss options for addressing these challenges under political constraints. As countries move toward deeper emissions cuts, combining and sequencing policies will prove critical to avoid environmental, economic, and political dead-ends in decarbonizing energy systems.
Diaz Anadon, Laura, Kelly Sims Gallagher, and John P. Holdren. 2017. “Rescue US energy innovation.” Nature Energy 2 (10): 760–763. Publisher's Version Abstract
President Trump has proposed severe cuts to US government spending on energy research, development and demonstration, but Congress has the ‘power of the purse’ and can rescue US energy innovation. If serious cuts are enacted, the pace of innovation will slow, harming the economy, energy security and global environmental quality.
Goldstein, Anna P., and Venkatesh Narayanamurti. 2017. “Simultaneous Pursuit of Discovery and Invention in the US Department of Energy.” Harvard Kennedy School, RWP17-046. Abstract
The division of “basic” and “applied” research is embedded in federal R&D policy, exemplified by the separation of science and technology in the organizational structure of the US Department of Energy (DOE). In this work, we consider a branch of DOE that shows potential to operate across this boundary: the Advanced Research Projects Agency – Energy (ARPA-E). We construct a novel dataset of nearly 4,000 extramural financial awards given by DOE from 2010 to 2015, primarily to businesses and universities. We collect the early knowledge outputs of these awards from Web of Science and the United States Patent and Trademark Office. Compared to similar awards from other parts of DOE, ARPA-E awards are more likely to jointly produce both a publication and a patent, with at least 5 times higher odds. ARPA-E awards have been productive in creating new technology, without a detrimental effect on the production of new scientific knowledge. This observation suggests the unity of research activities which are often considered separate: that which produces discoveries and that which produces inventions.
The behavioral responses to taxes and subsidies are often subject to various behavioral biases and transaction costs—what we define as “microfrictions.” We develop a theoretical framework to show how these microfrictions—and their heterogeneity across the population and policy instruments— affect the design of Pigouvian policies. Standard Pigouvian pricing still holds with transaction costs, but requires adjustment with behavioral biases. We use transaction-level data from the US appliance market to estimate the heterogeneous behavioral responses to an array of energy fiscal policies and to quantify microfrictions. We then assess optimal fiscal policies and find that it is rarely optimal to couple a Pigouvian tax on energy with an investment subsidy in this context. We also find that energy labels—intended to increase the salience of energy information—can interact in perverse ways with both taxes and subsidies.
Schmalensee, Richard, and Robert N. Stavins. 2017. “Lessons Learned from Three Decades of Experience with Cap and Trade.” Review of Environmental Economics and Policy 11 (1): 59–79. Publisher's Version Abstract
This article presents an overview of the design and performance of seven major emissions trading programs that have been implemented over the past 30 years and identifies a number of important lessons for future applications of this important environmental policy instrument. A brief discussion of several other proposed or implemented emissions trading programs is also included.
Mehling, Michael A., Gilbert E. Metcalf, and Robert N. Stavins. 2017. “Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement) .” Harvard Kennedy School. Publisher's Version Abstract
The Paris Agreement has achieved one of two key necessary conditions for ultimate success – a broad base of participation among the countries of the world.  But another key necessary condition has yet to be achieved – adequate collective ambition of the individual nationally determined contributions. How can the climate negotiators provide a structure that will include incentives to increase ambition over time?    An important part of the answer can be international linkage of regional, national, and sub‐ national policies, that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes climate policies along five dimensions – type of policy instrument; level of government jurisdiction; status of that jurisdiction under the Paris Agreement; nature of the policy instrument’s target; and the nature along several dimensions of each Party’s Nationally Determined Contribution.  We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement.
Inadequate policy surveillance has undermined the effectiveness of multilateral climate agreements. To illustrate an alternative approach to transparency, I evaluate policy surveillance under the 2009 G-20 fossil fuel subsidies agreement. The Leaders of the Group of 20 nations tasked their energy and finance ministers to identify and phase-out fossil fuel subsidies. The G-20 leaders agreed to submit their subsidy reform strategies to peer review and to independent expert review conducted by international organizations. This process of developed and developing countries pledging to pursue the same policy objective, designing and publicizing implementation plans, and subjecting plans and performance to review by international organizations differs considerably from the historic approach under the UN Framework Convention on Climate Change. This paper draws lessons from the fossil fuel subsidies agreement for climate policy surveillance.
Gerarden, Todd D., Richard G. Newell, and Robert N. Stavins. 2017. “Assessing the Energy-Efficiency Gap.” Journal of Economic Literature 55 (4): 1486–1525. Publisher's Version Abstract
Energy-efficient technologies offer considerable promise for reducing the financial costs and environmental damages associated with energy use, but it has long been observed that these technologies may not be adopted by individuals and firms to the degree that might be justified, even on a purely financial basis. We survey the relevant literature on this "energy-efficiency gap" by presenting two complementary frameworks. First, we divide potential explanations for the energy-efficiency gap into three categories: market failures, behavioral explanations, and model and measurement errors. Second, we organize previous research in terms of the fundamental elements of cost-minimizing energy-efficiency decisions. This provides a decomposition that organizes thinking around four questions. First, are product offerings and pricing economically efficient? Second, are energy operating costs inefficiently priced and/or understood? Third, are product choices cost minimizing in present value terms? Fourth, do other costs inhibit more energy-efficient decisions? We synthesize academic research on these questions, with an emphasis on recent empirical findings, and offer suggestions for future research.
Hogan, William W. 2017. “An efficient Western Energy Imbalance Market with conflicting carbon policies.” The Electricity Journal 30 (10): 8–15. Publisher's Version Abstract
A reform of the Western Energy Imbalance Market should target the right problem. Import leakage is a problem; resource shuffling is a solution. Proposed modifications for the existing EIM design target the wrong problem and would work at cross purposes to the very reasons for the EIM’s existence. There is a better approach that would address the right problem and preserve the critical elements of the existing EIM design.

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