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RESEARCH OUTLINE

Global Climate Change
Methods of Analyzing Environmental Policies
The Costs of Environmental Protection
The Benefits of Environmental Protection
Political Economy of Environmental and Resource Policy
Corporate Social Responsibility
Trade, Development, and the Environment
Natural Resource Economics
Energy Policy
Textbooks and Teaching Materials

RESEARCH SUMMARY

Note:  The Faculty Fellows of the Harvard Environmental Economics Program (HEEP) frequently collaborate with coauthors in other universities, think tanks, and the private sector.  Although the names of coauthors are suppressed for brevity in this research summary, these outside collaborations are a fundamental component of environmental and natural resource economics research at Harvard.  Indeed, the broad disciplinary and interdisciplinary networks upon which the Fellows draw are one of the Harvard Environmental Economics Program’s most important assets.

Global Climate Change

HEEP Faculty Fellows are very active in the academic and policy communities on the issue of global climate change.

International Policy Architecture
Because climate change has global causes and consequences, an effective policy response will require international cooperation.  Many HEEP faculty fellows have published on this topic.  For example, Professor Robert Stavins has published a number of papers on international policy architectures for the post-Kyoto period (with former Pre-Doctoral Fellows Sheila Olmstead and Joe Aldy) and “bottom-up” linking tradable permit systems for greenhouse gases; Professor Richard Cooper has written several papers on the structural weaknesses of the Kyoto Protocol and the potential benefits of carbon taxes; Professor Lawrence Summers has written on potential policy alternatives to the Kyoto protocol; and Professor Jeffrey Frankel, who participated in U.S. climate policy formulation and evaluation while serving as a member of the Clinton administration’s Council of Economic Advisors, argued in a recent book chapter that an international policy architecture should include decade-by-decade quantitative emission targets. HEEP faculty research has also examined how to encourage developing country participation in emissions reductions agreements.  For example, Professor Dale Jorgenson is examining the developing country response to climate change initiatives, and Dr. Theodore Panayotou and coauthors have proposed and analyzed a compensation system to promote developing country participation in climate change agreements.

Economic Analysis of Climate Change Policy
Effective climate change policy also requires understanding of the economics of climate change.  Professor James Hammitt has authored a variety of articles about decision-theoretic approaches to climate change, including a 1992 Nature article presenting a sequential decision strategy for abating climate change.  Professor Martin Weitzman has analyzed how the choice of discount rates affects conclusions about the importance of immediate action to prevent climate change; additionally, in recent research, he argues that low-probability, high-impact disasters (such as the approximately five percent probability that global temperatures will eventually rise by 20 degrees Fahrenheit) create large uncertainties that can overwhelm conventional cost-benefit analysis of climate change policy.  Professor Dale Jorgenson has developed a dynamic econometric model of the costs of alternative policies to reduce U.S. carbon emissions.  Professor Robert Stavins, former Pre-Doctoral Fellow Richard Newell, and coauthor have analyzed how economic and policy incentives influence the development of carbon mitigation technologies.

U.S. Climate Policy
Professor Robert Stavins has written several articles on domestic climate policy, including a proposal for a cap-and-trade system for greenhouse gases

Carbon Sequestration
Carbon sequestration is a potential way to reduce net greenhouse gas emissions.  Professor Robert Stavins, former Pre-Doctoral Fellow Richard Newell, and coauthor have estimated the costs of carbon sequestration using an econometric analysis of factors affecting U.S. land use changes. The project builds upon a 1999 AER article in which Stavins developed an approach for econometrically estimating the costs of carbon sequestration, and a 2000 JEEM article in which Newell and Stavins examined the sensitivity of these costs to a variety of factors.

Methods of Analyzing Environmental Policies

Economic Perspective
Economics provides a useful set of analytical tools with which to analyze environmental problems.  In a 1998 Nature article, Professor Robert Stavins and coauthor argued that economists and ecologists often misunderstand each other, and that improved interdisciplinary communication can help natural scientists to take economics more seriously.

Cost-Benefit Analysis
As Professor Robert Stavins and coauthors argued in a 1996 Science article, cost-benefit analysis is an important tool for making decisions about environmental, health, and safety regulations.  Benefit-cost analysis also requires policy makers to compare welfare changes that occur at different times.  Professor Martin Weitzman has written extensively on this topic, including articles on how to discount the far-distant future, and how uncertainty affects the choice of discount rate.  Professor Stavins and coauthor have also written about discounting, for example, in a 2002 Nature article about how discounting affects the evaluation of environmental policies.  In other cost-benefit related research, Stavins and coauthors have assessed the potential role of health-health analysis in policymaking, the value of formal uncertainty analysis in regulatory impact analyses, and developed a methodology to estimate the potential cost savings from using market based policy instruments instead of conventional uniform environmental standards, using only modest amounts of information (with former Pre-Doctoral Fellow Richard Newell).

Risk Assessment
In a 2004 paper, Professor Michael Toffel and coauthor evaluated thirteen methods of calculating weighting factors for the environmental and human health impacts of toxic releases.

Sustainability
Sustainability is frequently cited as the goal of environmental policies; yet, the concept is seldom defined carefully.  Professor Robert Stavins and former Pre-Doctoral Fellows Alexander Wagner and Gernot Wagner have developed a concept of sustainability that combines dynamic efficiency and inter-generational equity.  In other sustainability research, Professor Toffel and coauthor developed a hierarchy of categories that fall within the general concept of sustainability.

The Costs of Environmental Protection

Empirical Cost Estimates
HEEP faculty fellows have conducted a variety of empirical research on the costs of environmental protection.  In a 1990 article, Professor Dale Jorgenson and coauthor used simulations to estimate the overall cost of pollution abatement regulations to the U.S. economy.  Professor Robert Stavins and coauthors also examined the aggregate costs of U.S. environmental regulations in a 1995 JEL article in which they concluded that available evidence suggests that environmental regulations have had little impact on the productivity and competitiveness of U.S. manufacturing industries. More focused studies by Professor David Bloom have considered cross-national analyses of the economics of municipal solid waste.

Market-Based Policy Instruments
Compared with traditional command-and-control environmental regulations, market-based policy instruments can often achieve better environmental outcomes at a lower cost.  HEEP faculty fellows have conducted research on the design of such market-based instruments.  For example, Professor Steven Shavell has written on the optimal design of Pigouvian taxes in the presence of administrative costs; Professor Stavins authored a 1998 JEP paper analyzing policy lessons from the sulfur dioxide emissions trading program, a 1992 paper exploring the effects of transactions costs on markets for tradable permits, and an analysis of historical experience with market-based instruments; and Professor Erich Muehlegger is currently examining the effects of hybrid automobile purchase subsidies. 

Choice of Policy Instrument
In addition to their research on the design of market-based instruments, HEEP faculty fellows have made important contributions to a long-standing debate about the relative economic efficiency of different market-based instruments.  In a widely-cited 1974 article, “Prices Versus Quantities”, Professor Martin Weitzman showed that when the costs of pollution control are uncertain, the relative efficiency of emissions taxes and quotas depends on the slopes of the marginal benefit and marginal cost curves.  In related research, Professor Robert Stavins has analyzed the choice between quantity and price instruments when costs and benefits are both uncertain and are correlated; Professors Steven Shavell and Louis Kaplow have compared a non-linear tax schedule against a quantity instrument; Professors Edward Glaeser and Andrei Schleifer argue that the existence of monitoring costs favors quantity instruments; and Professor Weitzman has analyzed the choice between landing fees and harvest quotas when fish stocks are uncertain.  Professor Stavins and former Pre-Doctoral Fellow Lori Bennear have also argued that in a second-best world in which there are exogenous political constraints or multiple market failures, an optimal environmental policy should incorporate multiple market-based instruments.

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. Research by Professor Felix Oberholzer-Gee and coauthor indicate that property values decline after new TRI pollution data become available, indicating that nearby homeowners adjust their risk perceptions to account for this new information.  Professor Michael Toffel and coauthor use institutional theory to argue that such information disclosure programs are most likely to spur responses from firms whose legitimacy is challenged by the information.  Additionally, Professors Robert Stavins and Forest Reinhardt and coauthors are engaged in research on the theoretical efficacy and empirical effects of the TRI program.

Liability and Product Take-Back Regulation
It is becoming increasingly common for countries in Europe and Asia to require companies to collect and dispose of the hazardous wastes contained in the products they manufacture.  Professor Michael Toffel’s research on these product take-back regulations explores their consequences for the environment, institutions, and corporate strategy.  In addition, Professor Steven Shavell has written extensively on the economics of liability rules.  His research covers optimal clean-up and liability regulation for managing harmful environmental discharges, as well as the relative economic merits of liability and property rules

Vintage-Differentiated Environmental Regulation
Professor Robert Stavins has investigated the efficiency and policy implications of vintage differentiated environmental regulations that apply less stringent environmental standards to older vintages of sources, whether motor vehicles, manufacturing plants, or power plants.

Technological Change and the Environment
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.  Professor Robert Stavins has actively pursued research on all of these topics.  For example, in a 1999 QJE paper, Professor Stavins, former Pre-Doctoral Fellow Richard Newell, and coauthor conducted an econometric analysis of the impact of energy efficiency standards on innovation in specific household durable goods, in which they found that energy prices as well as particular standards had significant impacts on the average energy efficiency of appliances such as air conditioners and water heaters.  Stavins and coauthors have also investigated the interactions between market failures in technology policy and pollution control (with Newell and coauthor), the effect of environmental regulations on technology diffusion in the chlorine manufacturing industry (with Professor Nolan Miller and former Pre-Doctoral Fellow Lori Bennear), and regulatory effects on technology diffusion in the context of thermal insulation technologies in new home construction.  Other HEEP fellows have also investigated the relationship between environmental regulation and technological innovation.  For example, in a 1996 paper, Professor Ariel Pakes and coauthor found evidence that changes in emissions standards and gas prices induced emissions and fuel-saving technological change in the automobile industry.

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, former Pre-Doctoral Fellow Nathaniel Keohane, and coauthor have developed a theoretical model of environmental standard setting when the pollutant has both flow and stock characteristics.

The Benefits of Environmental Protection

Revealed Preference Estimates of Environmental Benefits
Because environmental goods are not traded directly in markets, economists have devised a variety of indirect methods for estimating the value that people place on these non-market goods.  HEEP fellows have made a number of contributions to this literature.  For example, Professor Jerry Green has authored papers on techniques for estimating revealed preference welfare estimates for less-than-rational decision makers, and on methods for inducing people to reveal their preferences for public goods in an incentive-compatible way; Professor Steven Shavell has written on the relationship between property values and air pollution, and the legal implications of stated preferences estimates of non-use values; and Professor Robert Stavins and former Pre-Doctoral Fellows Lori Bennear and Alexander Wagner have developed an environmental valuation approach based on econometric estimates of the derived demand for the privately traded option to use a public good, with an empirical application to demand for recreational fishing licenses and valuation of an expected fishing day.

Valuing Risk Reductions
Environmental regulations often reduce the chance that individuals will develop health problems caused by pollutants in the air, water, and soil.  HEEP faculty fellows have conducted a variety of research on techniques for valuing these risk reductions.  For example, Professor James Hammitt is actively engaged in research that measures willingness-to-pay for risk reductions. In a recent paper, Professor Hammitt found evidence that in Taiwan, demand for mortality risk reductions increases more than proportionally with income, indicating that mortality risk reduction is a luxury good.  In other research, Professor Richard Zeckhauser and former Harvard Professor Kip Viscusi conducted a survey to identify the influence of behavioral propensities on respondents’ assessments of the risk of climate change and willingness to pay to avoid climate change.  

Political Economy of Environmental and Resource Policy

Because most environmental policy decisions are made by governments, environmental regulation is constrained by what is politically feasible.  In a 1998 article, Professor Robert Stavins, former Pre-Doctoral Fellow Nathaniel Keohane, and coauthor analyzed why the political reality of U.S. environmental regulation diverges sharply from normative economic theory.  They found four significant gaps:  the relative prevalence of command-and-control regulations and absence of market-based instruments; the ubiquity of “grandfather” clauses that permit older plants to use dirtier technologies; the use of tradable emissions permits instead of emissions taxes; and the recent gain in acceptance of market-based instruments.  Professor Stavins, former Pre-Doctoral Fellow Sheila Olmstead, and coauthor have also analyzed how attitudes towards environmental policy in the U.S. Congress and the Clinton administration were influenced by the economic ideas of efficiency, cost-effectiveness, and equity.

Corporate Social Responsibility

Environmental Compliance Decisions of Firms
Several HEEP fellows have examined when and why corporations over-comply with environmental regulations.  For example, Professor Forest Reinhardt's current work examines the circumstances under which the voluntary provision of public goods might be sensible from a firm’s point of view.  His research investigates the ways in which a firm's chances of success in pursuing “beyond-compliance” strategies are influenced by the firm’s market position and organizational capabilities and by the basic structure of the industry in which it competes.  His recent contributions include a chapter in “Environmental Protection and the Social Responsibility of Firms,” (a book edited by Professors Robert Stavins, Richard Vietor, and Bruce Hay), and an article on corporate social responsibility co-written with Stavins and Vietor.  Other HEEP faculty fellows engaged in research on CSR include Professor Steven Shavell, who has analyzed whether excessive legal standards can discourage environmentally desirable activities, and Professor Michael Toffel, whose recent research shows that facility managers’ decisions are affected by external constituents (such as customers, regulators, and local communities) who interact with influential departments within the firm.  Other related research by Professor Toffel includes a 2004 analysis of the circumstances under which it is efficient for manufacturers to engage in product recovery efforts, and a 2003 case study of how BMW Group’s sustainability management system has influenced the company’s commitments to the UN Global Compact.

In addition, Professors Reinhardt, Stavins, and Vietor have examined the four key questions about the notion of firms sacrificing profits in the social interest:  May they do so within the scope of their fiduciary responsibilities to their shareholders?  Can they do so on a sustainable basis?  Do firms, in fact, reduce their earnings by voluntarily engaging in environmental stewardship?  And finally, should firms carry out such profit-sacrificing activities?

 

Enforcement of Environmental Regulations
Harvard research on CSR also examines why some firms voluntarily disclose violations of environmental regulations.  For example, in two recent papers, Professor Michael Toffel and coauthor analyze how regulatory agency policies can improve self-disclosure of environmental regulations.  Using empirical data on the U.S. EPA’s “Audit Policy” program, he finds that recent enforcement and guarantees of immunity both increase the likelihood of self-disclosure.  In related work, Professors Steven Shavell and Louis Kaplow have investigated the optimal design of self-reporting regulations for crimes involving externalities.  Professor Erich Muehlegger’s recent research examines how diesel fuel tax evaders react to new regulatory enforcement strategies.

Trade, Development, and the Environment

Trade and the Environment
International trade can have both positive and negative consequences for environmental quality.  In a 2004 paper, Professor Jeffrey Frankel found that this relationship is primarily positive for three main measures of air pollution.  Frankel has also analyzed the relationship between trade barriers and carbon leakage under a global climate agreement.  Other research by HEEP faculty fellows has also investigated the effects of trade.  Professor Richard Cooper recently contributed to a policy forum on the relationship between trade and the environment.  The forum was later published in Environment and Development Economics.  Professor Robert Lawrence, who served on the Council of Economic Advisors in the Clinton Administration, has also published a wide variety of papers on trade and its impacts.   

Economic Development and the Environment
Several HEEP faculty fellows are studying the relationship between economic development and the environment.  For example, Professor Michael Kremer’s recent research focuses on the effects of improved water quality in developing countries.  Professor Theodore Panayotou is also actively engaged in research on the connection between globalization and the environment. His recent work identifies the key links between globalization and environment, the major issues addressed in multilateral economic agreements in trade and finance that affect environmental sustainability, and the incentives implicit in trade and investment policy measures that affect environmental sustainability.  Additionally, Professor David Bloom has written extensively on the link between health status and economic growth, and on the consequences of population change on economic development.  For example, in a 1995 Science article titled “International Public Opinion and the Environment,” Bloom found that residents of both industrialized and developing countries accept responsibility for environmental problems and believe that governments and international institutions are necessary to address environmental issues.

Natural Resource Economics

Because the world has limited natural resources, individuals, businesses, and policy makers must make difficult choices about how best to consume and allocate resources.  HEEP fellows have conducted theoretical and empirical research on how best to make such resource allocation decisions.

General Natural Resource Management
In a 2000 AER paper titled, “Elephants,” Professor Michael Kremer and coauthor analyzed optimal management policy for an open-access resource that can be used to produce storable goods.

Non-renewable Resources
A common perception is that the world is “running out” of oil, minerals, and other non-renewable resources.  In a 1999 QJE paper, Professor Martin Weitzman estimated how much economic growth is actually limited by minerals depletion.  Although in absolute terms, these costs are large, they are small relative to the growth that technological change is likely to create.

Water Demand
Recent years have seen an increase in water demand for residential, agricultural, manufacturing, and environmental uses.  A variety of Harvard research seeks to discover ways to reconcile these conflicting demands while managing risks from climate change, drought, and depleted water tables.  For example, Professor Stavins, former Pre-doctoral Fellow Sheila Olmstead, and coauthor recently completed an econometric analysis of the effects of prices, alternative price structures, and non-price utility conservation policies on water demand in twelve U.S. cities.  Stavins and Olmstead have also compared market-based and regulatory approaches to urban water conservation.

Land Use
HEEP fellows have conducted a variety of research on the environmental and economic effects of land use regulations.  Professor Richard Peiser has published a variety of papers on land use, including the effectiveness of markets for contaminated properties, and the value of public open space in subdivisions.  Professor Edward Glaeser has written extensively on the economics of cities, including the effects of land-use regulation.  Professor Robert Stavins, former Pre-doctoral Fellow Ruben Lubowski, and coauthor recently used an econometric model to analyze how markets and farm policies affected land use change in the United States between 1982 to 1997.  This research built on previous papers by Stavins and coauthors, including analyses of the effects of development on prices for agricultural land (with Lubowski) and the effect of federal flood control policies on conversion of wetland to farmland, and a comparison of alternative land use strategies for wetlands

Biodiversity
Conservation policies seek to protect biodiversity; yet, it is often unclear what exactly biodiversity means or what kinds of economic tradeoffs are relevant in preserving it.  Professor Martin Weitzman’s research on biodiversity demonstrates how a objective measure of diversity can be constructed from appropriate measures of the biological or ecological “distance” between any two species.  His papers on this topic include an application of biodiversity theory to the choice of how to allocate conservation resources between fifteen species of wild cranes, and an analysis of how growing high-yield, monoculture crops creates negative externalities by increasing the risk of endogenous crop diseases.

Natural Disasters
Because natural disasters are rare, unpredictable, and costly, formulating sensible policies to deal with them is difficult.  Professor Richard Zeckhauser has researched this problem extensively.  For example, Zeckhauser has identified three main obstacles to establishing prevention and preparation policies that could mitigate the future costs of natural disasters (with Professor Alan Berger and former Pre-Doctoral Fellow Carolyn Kousky); proposed a novel methodology that uses building permits as a source of information about the intentions of private investors to put capital into an area, in order to allocate funds for infrastructure to protect against natural disasters (with Kousky and Professor Erzo Luttmer); and found that multiple Nash equilibria can occur if the government is responsible for providing infrastructure to protect economic zones from natural disasters (with Kousky and Luttmer).  Along with former Harvard Professor Kip Viscusi, Zeckhauser has collected national survey data on respondents’ assessments of their own fatality risks from natural disasters.

Energy Policy

A number of HEEP fellows have conducted research on the economics of energy policy.  Professor William Hogan has written extensively about energy market modeling, deregulation of electricity markets, and energy policy.  Professor Joseph Kalt has also written on energy deregulation, particularly in markets for natural gas.  Professor Erich Muehlegger’s research investigates how environmental regulation of gasoline content plays in gasoline price volatility and the extent to which price spikes in gasoline markets could be mitigated by uniform regulation.  Professor Richard Vietor is working with Professor Felix Oberholzer-Gee on a project that studies the rapid development of wind power and wind technology worldwide.

Textbooks and Teaching Materials

Harvard faculty members have published many textbooks relevant to environmental and natural resource economics.  “Income, Wealth, and the Maximum Principle,” by Professor Martin Weitzman, is a graduate/advanced undergraduate textbook that explains how optimal control theory can be used to solve a variety of capital and resource allocation problems.  “Energy, the Environment, and Economic Growth” is a collected volume of Professor Dale Jorgenson’s papers on the relationship between the environmental quality and economic growth.  Professor Robert Stavins has written and edited several books on environmental economics, including, “Economics of the Environment,” “The Political Economy of Environmental Regulation,” “Environmental Economics and Public Policy,”, and “Public Policies for Environmental Regulation.”  Dr. Theodore Panayotou has published several books on environmental policy in the developing world, including “Not by Timber Alone: Economics and Ecology for Sustaining Tropical Forests,” “Green Markets,” “Instruments of Change,” and “Environment for Growth in Central America.”  Professor Richard Vietor has authored more than three dozen business school case studies on international energy issues and the regulation of natural gas, nuclear power, air pollution, and hazardous wastes.  Professor Forest Reinhardt has also written a variety of cases on environmental issues in business strategy, as well as a book, “Down to Earth: Applying Business Principles to Environmental Management.”

 

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