Review of Environmental Economics and Policy - recent issues

Introduction to the Issue

2008-04-28

Environmental Economics at the World Bank

Dasgupta, S., Hamilton, K., Pagiola, S., Wheeler, D. — 2008-04-28

On Behavioral-Environmental Economics

Shogren, J. F., Taylor, L. O. — 2008-04-28

Is the Stern Review an Economic Analysis?

Mendelsohn, R. — 2008-04-28

An Even Sterner Review: Introducing Relative Prices into the Discounting Debate

Sterner, T., Persson, U. M. — 2008-04-28

A Critique of the Stern Review's Mitigation Cost Analyses and Integrated Assessment

Weyant, J. P. — 2008-04-28

Why Economic Analysis Supports Strong Action on Climate Change: A Response to the Stern Review's Critics

Dietz, S., Stern, N. — 2008-04-28

California's New Greenhouse Gas Laws

Hanemann, M. — 2008-04-28

Reflections on the Literature

Smith, V. K. — 2008-04-28

Announcements

2008-04-28

Introduction to the Issue

Stavins, R., Carraro, C., Kolstad, C. — 2007-01-01

The Evolving Regulatory Role of the U.S. Office of Management and Budget

Graham, J. D. — 2007-01-01

Since the early Reagan years, critics have argued that benefit-cost analysis is used by the U.S. Office of Management and Budget (OMB) as a one-sided tool of deregulation to advance the interests of business. This article discloses a little-known fact: The OMB also plays a powerful pro-regulation role when agency proposals address market failures and are supported by benefit-cost analysis. Drawing on four case studies from the George W. Bush administration, the author examines how and why the OMB encouraged regulatory initiatives and protected some rule making from opposition by forces both inside and outside of the executive branch. The case studies address the labeling of foods for trans fat content, control of diesel engine exhaust, improvement of light-truck fuel economy, and control of air pollution from coal-fired power plants. The OMB's role in the 2001–2006 period was unusual by historic standards because rather than await agency drafts, the OMB played a proactive role in both the initiation of rule making and the creation of regulatory alternatives for consideration. However, the benefit-cost framework could be much more powerful if greater investments were made in applied research to expand knowledge on key regulatory issues.

How Well Does the U.S. Government Do Benefit-Cost Analysis?

Hahn, R. W., Dudley, P. M. — 2007-01-01

To make prudent recommendations for improving the use of benefit-cost analysis in policy settings, some measures of how well it is actually done are essential. This article develops new insights on the potential usefulness of government benefit-cost analysis by examining how it is actually performed in the United States.

We assess the quality of a particularly rich sample of benefit-cost analyses of federal regulations. The data set we use for assessing the quality of regulatory analysis is the largest assembled to date for this purpose. The seventy-four analyses we examine span the Reagan administration, the George H. W. Bush administration, and the Clinton administrations. The article is the first to assess systematically how government benefit-cost analysis has changed over time.

There are three key findings. First, a significant percentage of the analyses in all three administrations does not provide some very basic economic information, such as information on net benefits and policy alternatives. For example, over 70 percent of the analyses in the sample failed to provide any quantitative information on net benefits. Second, there is no clear trend in the quality of benefit-cost analysis across administrations. Third, there is a great deal of variation in the quality of individual benefit-cost analyses.

The Status of Women in Environmental Economics

Bhattacharjee, S., Herriges, J. A., Kling, C. L. — 2007-01-01

This article examines the status of women in the environmental economics profession in terms of their representation and impact. Three indicators are used to gauge the status of women in the profession. They are the representation of women in academia in the United States and Canada, the publication profiles of female environmental economists, and the representation of women in the roles of leadership within the professional association and lead journal of the profession. In a survey of schools with graduate programs in environmental economics, we find that female environmental economists are better represented in the faculty of noneconomics departments than in those of economics departments. A study of the publication profiles of women in the profession's main journal, the Journal of Environmental Economics and Management, indicates that women publish fewer articles on average than their male counterparts, and their papers receive fewer citations on average. Women are well represented in the leadership of the Association of Environmental and Resource Economists and also in editorial positions at the Journal of Environment Economics and Management.

Valuing Changes in Mortality Risk: Lives Saved Versus Life Years Saved

Hammitt, J. K. — 2007-01-01

This paper provides theoretical background for a symposium on whether the monetary value of changes in mortality risk resulting from environmental policy is best summarized in terms of a ‘value per statistical life’ (VSL) or ‘value per statistical life-year’ (VSLY). The relationship between VSL and VSLY may be clarified by recognizing that any change in an individual's mortality risk can be described by a corresponding shift in her survival curve, which can be summarized by the expected number of lives saved (as a function of time or within a specified time period) or by the expected number of life-years saved. An individual's willingness to pay (WTP) for a shift in her survival curve can be summarized by her average VSL or VSLY for that change. Economic theory suggests that both VSL and VSLY may depend on the individual's initial survival curve, characteristics of the shift, and individual characteristics such as health and income. Neither VSL nor VSLY is likely to be constant across changes in mortality risk. Hence, accurate valuation requires the use of scenario-specific values. The choice between VSL and VSLY summary measures is largely one of convenience.

Age Differences in the Value of Statistical Life: Revealed Preference Evidence

Aldy, J. E., Viscusi, W. K. — 2007-01-01

Revealed preference evidence, especially based on wage-risk tradeoffs in the labor market, provides the primary empirical basis for analyses of the value of statistical life (VSL). This market evidence also provides guidance on how VSL varies with age. While labor market studies have generated conflicting evidence—some showing that VSL rises with age and others showing that VSL declines with age—more refined estimates that take into account the age variation in job fatality risks or life-cycle patterns of consumption show an inverted U relation between the VSL and age. The value of a statistical life-year shows a similar pattern and is not time-invariant. Applying estimates of the VSL-age relationship to an analysis of the Clear Skies initiative illustrates the implications of recognizing the age-VSL relationship.

Mortality-risk Valuation and Age: Stated Preference Evidence

Krupnick, A. — 2007-01-01

Controversy over the value of statistical life (VSL) centers on whether a single value should be applied to all age groups, as currently done by US government agencies, or whether lower values should be used for the elderly, recognizing that their life expectancies are shorter than those of younger people. Surveys of different age groups' willingness to pay (WTP) for mortality-risk reductions can potentially help resolve this issue.

This paper reports on an analysis of this survey literature. Of some 36 studies reviewed, the literature is split on whether older people have a lower WTP for mortality-risk reductions. Even among the studies that find such a discount, its size varies widely. A simple statistical analysis of this literature reveals that larger samples and samples with a higher fraction of older people are significantly associated with finding this effect, suggesting that conducting a larger, more thorough study may help resolve this issue. The paper also raises the possibility that the WTP estimated when all factors related to age are allowed to vary may be more useful to policy than the WTP estimated when all such factors are held constant. A clear finding is that there is no evidence to support use of a uniform value of statistical life year.

Policy Monitor * How US Government Agencies Value Mortality Risk Reductions

Robinson, L. A. — 2007-01-01

Reflections on the Literature

Smith, V. K. — 2007-01-01

Announcements

2007-01-01

Introduction to the Review

Stavins, R., Carraro, C., Kolstad, C. — 2007-01-01

Welcome

Cameron, T., Carson, R., Fisher, A. — 2007-01-01

A Celebration of Environmental and Resource Economics

Heal, G. — 2007-01-01

This paper presents a rather personal review of the state of environmental and resource economics, preceded by some comments on the evolution of the field. It moves from the history of the subject to the evolution of the Hotelling Rule and then via oil markets on to climate change, natural capital, ecosystem services, greening national income and sustainability.

To Tax or Not to Tax: Alternative Approaches to Slowing Global Warming

Nordhaus, W. D. — 2007-01-01

This study reviews different approaches to the political and economic control of global public goods such as global warming. It compares quantity-oriented control mechanisms like the Kyoto Protocol with price-type control mechanisms such as internationally harmonized carbon taxes. The analysis focuses on such issues as the relationship to ultimate targets, performance under conditions of uncertainty, volatility of induced carbon prices, the inefficiencies of taxation and regulation, potential for corruption and accounting finagling, and ease of implementation. It concludes that price-type approaches such as carbon taxes have major advantages for slowing global warming.

Uncertainty in Environmental Economics

Pindyck, R. S. — 2007-01-01

In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty—over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons. Incorporating uncertainty correctly into policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty—to my knowledge, none exist. Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don't know about the problem.

The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results

Ellerman, A. D., Buchner, B. K. — 2007-01-01

The European Union Emissions Trading Scheme (EU ETS) is the world's first large experiment with an emissions trading system for carbon dioxide (CO₂) and it is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. After providing a brief discussion of the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the U.S., this paper focuses on allowance allocation—the process of deciding who will receive the newly limited rights to emit CO₂. We describe how allowances were allocated in the EU ETS, with particular emphasis on the issues and problems encountered, including the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of Member States with respect to auctioning, benchmarking, and new entrant provisions, and the difficult issue of deciding to whom the expected shortage was to be allocated. Finally, we discuss the recently available data on 2005 emissions and what they indicate concerning over-allocation, trading patterns, and abatement. We conclude with some observations about the broader implications of the EU ETS, what seems to be unique about CO₂, and the fact that non-economic considerations inform the allocation of allowances.

Market and Price Developments in the European Union Emissions Trading Scheme

Convery, F. J., Redmond, L. — 2007-01-01

The European Union Emissions Trading Scheme (EU ETS), operating since January 2005, demonstrates that it is possible to create a market for carbon dioxide (CO₂) even when there is a degree of confusion and chaos in the initial allocation and implementation process. Through this emissions trading scheme, the Ehas succeeded in producing a price signal—via the trading price for European Union Allowances (EUAs)—that does, in some limited sense, reflect the scarce capacity of the earth's atmosphere to absorb more greenhouse gas emissions. This paper focuses on the key factors that have influenced the development and functioning of the EUA market. We first describe the institutional and legal framework for the EU ETS, the scheme's main design features and provisions, and how these factors are likely to affect the EUA market. Next, we discuss how the EUA market has developed and operated since the establishment of the EU ETS. In particular, we describe the intermediaries that have entered the market to facilitate EUA trading, and how the size and frequency of trades have changed over time; identify the key factors that appear to have affected EUA prices; and discuss the trends in EUA trading volumes and prices. The paper also discusses the outlook for the EU ETS in the Kyoto Phase and beyond.

Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy

Kruger, J., Oates, W. E., Pizer, W. A. — 2007-01-01

In 2005, the European Union introduced the largest and most ambitious emissions trading program in the world to meet its Kyoto commitments for the containment of global climate change. The EU Emissions Trading Scheme (EU ETS) has some distinctive features that differentiate it from the more standard model of emissions trading. In particular, it has a relatively decentralized structure that gives individual member states responsibility for setting targets, allocating permits, determining verification and enforcement, and making some choices about flexibility. It is also a "cap-within-a-cap," seeking to achieve the Kyoto targets while only covering about half of the EU emissions. Finally, it is a program that many hope will link with other greenhouse gas (GHG) trading programs in the future—something we have not seen among existing trading systems. Examining these features, coupled with recent EU ETS experience, offers lessons about how cost effectiveness, equity, flexibility, and compliance fare in a multi-jurisdictional trading program, and highlights the challenges facing a global emissions trading regime.

Policy Monitor * Edited by Maureen Cropper * The Clean Development Mechanism: History, Status, and Prospects

Lecocq, F., Ambrosi, P. — 2007-01-01

Through the Clean Development Mechanism (CDM), governments or firms in developed countries can participate in the financing of projects that reduce greenhouse gas (GHG) emissions in developing countries in exchange for emission reduction credits that they can use against their targets under the Kyoto Protocol. The CDM has developed very rapidly, and it is second only to the European Union Emissions Trading Scheme among the carbon markets. A typical CDM project today mitigates a gas other than CO₂ in Asia, with carbon credits purchased by a European private company. Despite significant limitations, the CDM provides an example of how financing for global public goods can support sustainable development. Looking forward, the CDM is not adapted to support the large-scale mitigation efforts that are required in large countries to meaningfully curb GHG emissions in the future. However, (an improved) CDM could still play a very important role in channeling international carbon finance to small- and medium-sized developing countries.

Reflections on the Literature

Smith, V. K. — 2007-01-01

This paper presents short discussions of recent research in three areas of environmental and resource economics. It is part of a continuing column that reviews and discusses the implications of various topics of interest in the current environmental and resource economics literature. The research areas discussed in this essay are behavioral economics and policy, the Tiebout model—old insights and new implications, and the limits to partial equilibrium benefit-cost analysis. In each case, the discussion considers one or more papers that present a framework for analysis, a set of policy recommendations, or new empirical findings.

In the first discussion, it is suggested that while behavioral economics offers a rich set of challenges to conventional theory, this does not mean the ideas are ready for the prime time of policy evaluation. The second discussion focuses on how new research based on the Tiebout logic is assembling a set of models that allows analyses of non-market behaviors to create feedbacks that influence market outcomes. The last discussion asks whether the partial equilibrium approximations conventionally used in benefit-cost analyses can be used equally well for evaluating small projects and large ones.

Announcements

2007-01-01