Energy Externalities

2019
Mehling, Michael A., Gilbert E. Metcalf, and Robert N. Stavins. 2019. “Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement).” Environmental Law 48. Publisher's Version Abstract
The Paris Agreement to the United Nations Framework Convention on Climate Change 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. 
2018
Gillingham, K., and J.H. Stock. 2018. “The Cost of Reducing Greenhouse Gas Emissions .” Journal of Economic Perspectives 32 (4): 53-72. Abstract

This paper reviews the cost of various interventions that reduce greenhouse gas emissions. As much as possible we focus on actual abatement costs (dollars per ton of carbon dioxide avoided), as measured by 50 economic studies of programs over the past decade, supplemented by our own calculations. We distinguish between static costs, which occur over the lifetime of the project, and dynamic costs, which incorporate spillovers. Interventions or policies that are expensive in a static sense can be inexpensive in a dynamic sense if they induce innovation and learning-by-doing.

Last updated on 11/08/2018
Schatzki, Todd, and Robert Stavins. 2018. Discussion Paper: GHG Cap-and-Trade: Implications for Effective and Efficient Climate Policy in Oregon. Harvard Project on Climate Agreements. Abstract
Like many other states, Oregon has begun to pursue climate policies to attempt to fill the gap created by the lack of effective climate policy at the Federal level. After adopting a variety of policies to address climate change and other environmental impacts from energy use, Oregon is now contemplating the adoption of a greenhouse gas (GHG) cap-and-trade system. However, interactions between policies can have important consequences for environmental and economic outcomes. Thus, as Oregon considers taking this step, reconsidering the efficacy of its other current climate policies may better position the state to achieve long-run emission reductions at sustainable economic costs.
Qiao, Qinyu, Wei Peng, Pu Wang, and Henry Lee. 2018. Harvard-Tsinghua Workshop on Low-Carbon Development and Public Policy. Environment and Natural Resources Program, Belfer Center for Science and International Affairs.
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).
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?"
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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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.
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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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