Global Environmental Issues

Global Climate Change:

Faculty Fellows with the Harvard Environmental Economics Program are very active in the academic and policy communities on the issue of global climate change. Professors Jeffrey Frankel and Robert Lawrence both served as Members of the Council of Economic Advisors and were active participants in U.S. policy formulation and evaluation during the Clinton administration. Dr. Theodore Panayotou, together with Jeffrey Sachs and Alix Peterson Zwane, is currently investigating the potential roles developing countries can play in climate change policy. Professor Dale Jorgenson along with Wenhua Di, a Ph.D. student in Public Policy and EEPHU Pre-doctoral Fellow, are also examining the developing country response to climate change initiatives with a particular focus on China. Professors Richard Cooper and Robert Stavins have also written extensively on the economics of global climate change policy.

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Trade and the Environment:

Professor Richard Cooper recently contributed to a policy forum on the relationship between trade and the environment that was published in Environment and Development Economics. Professors Jeffrey Frankel and Robert Lawrence, are currently engaged in research examining the connection between international trade, globalization, and environmental quality. Both were active in the formulation of U.S. trade and environmental policy while serving on the Council of Economic Advisors in the Clinton Administration. Professor Theodore Panayotou is also actively engaged in research on the connection between globalization and the environment. His recent work identifies: (a) the key links between globalization and environment; (b) the major issues addressed in multilateral economic agreements in trade and finance that affect environmental sustainability; and (c) the incentives implicit in trade and investment policy measures that affect environmental sustainability.

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Estimating the Benefits of Environmental Policy

Revealed Preference Estimates of Environmental Benefits:

In this research project, a new approach to environmental valuation is being developed, in which estimates are made econometrically of the derived demand for the privately traded option to use a public good. From this demand function, it is possible to infer the stochastically related underlying valuation of the public good itself. The empirical application is the demand for recreational fishing licenses and the related valuation of an expected fishing day. Pre-doctoral Fellows Lori Snyder, and Alex Wagner are working with Professor Stavins to bring this project to completion.

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Valuing Risk Reductions:

Professor James Hammitt is actively engaged in research that measures willingness-to-pay for risk reductions. Professor Hammitt is currently working on several projects that compare willingness-to-pay for risk reductions in developing and developed countries. In his recent paper "Survival is a Luxury Good" Professor Hammitt uses data from Tawian to estimate the income elasticity of demand for risk reduction. In cotrast to studies that rely only on U.S. data, Professor Hammitt's work finds an income elasticity above two indicating that in Tawain, risk reduction is a luxury good. Professor W. Kip Viscusi is actively conducting research that improves methods for valuing risk reductions. A principal ongoing project is the development of national benefit estimates for improved water quality. This study utilizes an iterative choice procedure for valuing inland water quality.  In the pretest results, respondents in Colorado and North Carolina assessed the value of increasing water quality to a level rated good by EPA. The results indicate that nonuse and probabilistic use are highly valued.  The results also indicate how water quality valuations differ for aquatic environment, edible fish, and swimming, as well as for water that is cloudy, smelly, or polluted by toxics.  The current focus of the research is taking the regional pretest nationwide which, pending approval from the Office of Management and Budget, will take place in 2001.

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Estimating the Costs of Environmental Policy

Effects of Information Disclosure Regulations:

There is increasing interest in the United States and other countries in the use of information disclosure programs as potential substitutes for, or complements to, conventional command-and-control or market-based environmental policy instruments. Much of this interest can be attributed to the apparent success of the Toxics Release Inventory (TRI) program, which requires large manufacturing facilities to report publicly their annual releases of certain chemicals. Since the inception of the TRI program in 1986, reported releases of over 300 regulated chemicals have fallen by more than 45 percent. Lori Snyder, Ph.D. student in Public Policy and Pre-doctoral Fellow in the Environmental Economics Program, together with Professors Robert Stavins, Nolan Miller and Forest Reinhardt, have begun to analyze the efficacy of such information disclosure programs by examining the ways in which these programs can - in theory - affect environmental quality, and by investigating empirically the ways in which the TRI program has actually affected pollutant releases.

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Environmental Compliance Decisions of Firms:

Professor Forest Reinhardt's current work focuses on enviromental management at the firm level. His recent work examines the circumstances under which the voluntary provision of public goods might be sensible from a firm's point of view. If environmental externalities were the only departure from the economic assumptions of perfect competition, and if no firms had preferential access to superior (low-cost) stocks of natural resources, then firms that volunteered to internalize costs could not survive. But since externalities coexist with other departures from the competitive paradigm (asymmetric information or oligopoly competition, for example), firms may find it in their shareholders' interests to provide environmental public goods to a greater degree than that required by law. A number of firms, especially in Europe and North America, assert that they are pursuing such "beyond-compliance" strategies. The decision whether to pursue such strategies should depend, among other things, on the structure of the firm's industry, its competitive position within that structure, and its internal organizational capabilities. Professor Reinhardt's work examines the ways in which a firm's chances of success in pursuing any one of them are influenced by the firm's market position and organizational capabilities and by the basic structure of the industry in which it competes.

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Technological Change:

Global climate change policy discussions and recent initiatives for improving energy efficiency suggest that the relationship between public policy and technological change is of more than just academic interest. The ability to estimate the likely effects of potential climate change policies on energy use and greenhouse gas emissions requires an improved understanding of the relationship between different policy alternatives and energy-saving changes in technology. Such technological changes may be decomposed into three processes: invention, innovation, and diffusion. Previous research has tended to focus separately on one of the three stages. Under a grant from the U.S. Department of Energy, Dr. Richard Newell of Resources for the Future, Professor Adam Jaffe of Brandeis University, and Professor Stavins are developing a modeling framework that permits joint consideration of the invention, innovation, and diffusion stages of technological change in energy-efficiency. One current project focuses on the innovation stage, that is, the commercialization of technologies. This project investigates whether government regulations have affected energy-efficiency innovation by analyzing econometrically the evolution of three energy-using household durable goods: central air conditioners, room air conditions, and water heaters. Simulations suggest that the post-1973 energy price increases account for one-quarter to one-half of the observed improvements in the mean energy efficiency of new models offered for sale over the last two decades. In addition, it appears that government energy efficiency standards have had a significant impact on the average energy efficiency of the product menu.

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Theory of Flow and Stock Pollutants:

Existing theoretical work on setting optimal environmental standards often categorizes pollutants as either flow or stock pollutants. However, many environmental problems are the result of both the quantity of pollutant flow and the overall level of the stock of the pollutant. HEEP Faculty Fellow Professor Richard Zeckhauser is currenlty working with Nathaniel Keohane of Yale (also a former Pre-doctoral Fellow with HEEP) and Benjamin van Roy of Stanford on developing a theoretical model of environmental standard setting when the pollutant has both flow and stock characteristics.

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Natural Resource Economics

Carbon Sequestration:

Under a grant from the U.S. Department of Energy, an econometric analysis of factors affecting U.S. land use changes is being carried out by Ruben Lubowski, of the U.S. Department of Agriculture; Professor Andrew Plantinga, Oregon State University; and Professor Robert Stavins, director of HEEP. The research project will yield reliable estimates of the costs of carbon sequestration. The project builds upon previous work in which Stavins developed an approach for econometrically estimating the costs of carbon sequestration (American Economic Review, 1999), and a previous study by Richard Newell of Resources for the Future and Professor Stavins in which they examined the sensitivity of these costs to a variety of factors (Journal of Environmental Economics and Management, 2000).

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Urban Water Demand:

Under a grant from the National Science Foundation, Professor Michael Hanemann of the University of California, Berkeley; Sheila Cavanagh Olmsteadof Yale University; and Professor Stavins are engaged in a research project on "Climate Change Response Strategies for Water Resources: Price and Non-Price Demand Management." The research project involves the analysis of water system flexibility through econometric estimation of the effects of prices, alternative price structures, and non-price utility conservation policies on water demand in 12 U.S. cities.

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