Cuicui Chen PhD in Public Policy 2018 examines the importance of forecasting in a new regulatory regime
By Doug Gavel
May 9, 2018
What happens when utility companies guess wrong when forecasting prices in a newly emerging government regulatory regime? And what can be done to reduce those forecasting errors? Those are two of the questions that Cuicui Chen PhD in Public Policy 2018 set out to answer when she launched her doctoral research project at Harvard Kennedy School.
Chen, who came to Harvard after earning her undergraduate degree in engineering at Tsinghua University in her native China, and her master’s degree in technology and policy at M.I.T., began asking questions like these as she grew more curious about the intersection of engineering, technology, and policy. She applied to the PhD in Public Policy (PPOL) Program at Harvard, she says, in hopes of delving deeply into these issues.
Chen’s dissertation consists of three separate papers, one of which (referred to as the “job market paper”) focuses on the world’s first large-scale cap-and-trade program, the Acid Rain program, which began in the mid-1990s following passage of the 1990 Clean Air Act. The Act paved the way for the formation of a unique emissions permit trading regime, creating an incentive for polluters to adopt cleaner technologies by allowing them to buy and sell pollution permits on the open market.
The new regime, while visionary in scope, was also fraught with challenges as utility companies and other polluters began developing strategies based on forecasts of future market conditions at a time when the market itself was nascent and relatively volatile.
When the program started, she says, the industrial forecast for the future pollution permit price was quite high–up near 800 dollars, but it turns out that the actual price never exceeded 250 dollars during the first ten years of the program.
“Firms at the time were not taking full account of the decline in the price of sub-bituminous coal, the kind of coal with very low sulfur content, which they could have observed,” Chen says. “So that was an expectation error.”
“Initially they got things wrong, but over time they were able to shift their management practices,” she says. “They were able to hire more people from the financial sector and improve their calculations about future market conditions in order to make better decisions on this regulatory program.”
Chen says her research underscores the importance of drawing upon accurate beliefs when making market-based decisions.
“In many cap and trade programs, you see companies not being very market sensitive to begin with … and you would expect them to make a lot of mistakes in the beginning in particular,” she says. “And in my research, I found that those miscalculations are very costly to the firms, and in turn, to consumers.”
To mitigate this problem, Chen argues that it is up to government to deploy policy options that will set upper and lower limits on permit prices, thereby reducing the volatility of the pricing scheme, and improving predictability. She also argues for better coordination among critical stakeholders like policymakers, electric utilities, and brokers firms.
“I think it is very important to make this information very transparent, to make this scale very transferable across different players,” she says.
Chen credits her six years at the Kennedy School for giving her new insight into her own potential.
“In China, I was taught to be in a fixed mindset–in believing that either I’m smart or not,” she says. “But here, I have gone through a transformative period where I discovered that the mindset is not fixed. There are always opportunities to learn. There are always opportunities to improve. Even if you fail at something doesn’t mean you will fail at more things later.”
Robert Stavins, A.J. Meyer Professor of Energy and Economic Development, who served as a faculty advisor to Chen and a member of her dissertation committee, remarks that he was impressed by the quality of Chen’s research project.
“She is bright, dedicated, and serious about her research, including her dissertation research in which she has merged two topics in her job market paper: the performance of a market-based environmental policy instrument (the SO2 allowance trading program under the Clean Air Act amendments of 1990), and learning-by-doing,” he writes. “She assembled an excellent data set that permitted her to test a set of key hypotheses.”
Following her graduation, Chen will begin a post-doctoral fellowship at the Belfer Center for Science and International Affairs this fall, where her faculty advisors will be Associate Professor Joseph Aldy, and Henry Lee, Senior Lecturer in Public Policy. And in the spring of 2019, she will begin a faculty appointment at the State University of New York (SUNY), Albany.