Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown

The theory of environmental regulation suggests that economic instruments, such as taxes and tradable permits, create more effective technology adoption incentives than conventional regulatory standards. We explore this issue for an important industry undergoing technological responses to a dramatic decrease in allowed pollution levels—the petroleum industry’s phasedown of lead in gasoline. Using a panel of refineries from 1971 to 1995, we provide some of the first direct evidence that alternative policies affect the pattern of adoption in expected ways. Importantly, we find that the tradable permit system used during the lead phasedown provided incentives for more efficient technology adoption decisions. Where environmentally appropriate, this suggests that flexible market-based regulation can achieve environmental goals while providing better incentives for technology diffusion.technology, adoption, diffusion, environment, regulation, lead, gasoline, tradable permit, incentive-based policy

Cost Heterogeneity and the Potential Savings from Market-Based Policies

Policy makers and policy analysts are frequently faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional command-and-control approaches. We develop rules-of-thumb that can be employed with minimal amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. Our hope is that these simple formulae can aid policy analysts and policy makers in the early stages of exploring alternative policy instruments by helping them identify approaches that merit greater attention and more detailed analysis. We illustrate the use of the rules-of-thumb with an application to nitrogen oxides control in the eastern United States.

Climate Change and Forest Sinks: Factors Affecting the Costs of Carbon Sequestration

The possibility of encouraging the growth of forests as a means of sequestering carbon dioxide has received considerable attention because of concerns about the threat of global climate change due to the greenhouse effect. In fact, this approach is an explicit element of both U.S. and international climate policies, partly because of evidence that growing trees to sequester carbon can be a relatively inexpensive means of combating climate change. But how sensitive are such estimates to specific conditions? We examine the sensitivity of carbon sequestration costs to changes in critical factors, including the nature of the management and deforestation regimes, silvicultural species, agricultural prices, and discount rates. We find, somewhat counter-intuitively, that the costs of carbon sequestration can be greater if trees are periodically harvested, rather than permanently established. In addition, higher discount rates imply higher marginal costs, and they imply non-monotonic changes in the amount of carbon sequestered. Importantly, retarded deforestation can sequester carbon at substantially lower costs than increased forestation. These results depend in part on the time profile of sequestration and the amount of carbon released upon harvest, both of which may vary by species, geographic location, and management regime, and are subject to scientific uncertainty.

Environmental and Technology Policies for Climate Mitigation

We assess different policies for reducing carbon dioxide emissions and promoting the innovation and diffusion of renewable energy. We evaluate the relative performance of policies according to incentives provided for emissions reduction, efficiency, and other outcomes. We also assess how the nature of technological progress through learning and R&D, and the degree of knowledge spillovers, affect the desirability of different policies. Due to knowledge spillovers, optimal policy involves a portfolio of different instruments targeted at emissions, learning, and R&D. Although the relative cost of individual policies in achieving reductions depends on parameter values and the emissions target, in a numerical application to the U.S. electricity sector, the ranking is roughly as follows: (1) emissions price, (2) emissions performance standard, (3) fossil power tax, (4) renewables share requirement, (5) renewables subsidy, and (6) R&D subsidy. Nonetheless, an optimal portfolio of policies achieves emissions reductions at significantly lower cost than any single policy.environment, technology, externality, policy, climate change, renewable energy

Technology Prizes for Climate Change Mitigation

We analyze whether technology inducement prizes could be a useful complement to standard research grants and contracts in developing climate change mitigation technologies. We find that there are important conceptual advantages to using inducement prizes in certain circumstances. These conceptual inferences are borne out by an examination of the track record of prizes inducing research into public goods, including relevant energy technologies. However, we also find that the prizes’ successes are contingent on their proper design. We analyze how several important design elements could influence the effectiveness of a climate technology prize.inducement prize, research and development, climate change, technology, policy

Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?

Costs and benefits in the distant future—such as those associated with global warming, long-lived infrastructure, hazardous and radioactive waste, and biodiversity—often have little value today when measured with conventional discount rates. We demonstrate that when the future path of this conventional rate is uncertain and persistent (i.e., highly correlated over time), the distant future should be discounted at lower rates than suggested by the current rate. We then use two centuries of data on U.S. interest rates to quantify this effect. Using both random walk and mean-reverting models (which are indistinguishable based on historical data), we compute the certainty-equivalent rate—that is, the single discount rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Using the random walk model, which we consider more compelling, we find that the certainty-equivalent rate falls from 3% now to 2% after 100 years, to 1% after 200 years, and down to 0.5% after 300 years. The mean-reverting model leads to a certainty-equivalent rate that remains above 3% for the next 200 years, then falls to 2% after 300 years and to 1% after 400 years. If we use these rates to value consequences at horizons of 400 years, the discounted value increases by a factor of 7,000 based on the random walk model and by a factor of 30 based on the mean-reverting model — both relative to conventional discounting. These results are relevant for a wide range of policy questions involving the distant future. Applying the random walk model to the consequences of climate change, for example, we find that inclusion of discount rate uncertainty doubles the expected present value of mitigation benefits. Other applications and alternative beliefs about the random walk–mean-reverting distinction are easily explored with our table of discount factors over time.

Simplified Marginal Effects in Discrete Choice Models

We show that after a simple normalization of explanatory variables so that they equal zero at some desired reference point, marginal effects for continuous variables in probit and logit models simplify dramatically, becoming a function of only the estimated constant term. We present similar simplifications for computation of the asymptotic variance of marginal effects, as well as for the effects of dummy variables on predicted probabilities. We provide a simple table, which in combination with raw probit or logit estimates, is all one needs to compute the desired effects.logit, probit, discrete choice, binary choice, marginal effect, data normalization

The Market-based Lead Phasedown

The U.S. lead phasedown was effective in meeting its environmental objectives, and did so more quickly with the allowance of permit banking. The marketable lead permit system was highly costeffective, saving hundreds of millions of dollars relative to comparable policies not allowing trading or banking. Estimates suggest that transaction costs brought about only a modest reduction in program efficiency. The market-based nature of the program also provided incentives for more efficient adoption of new lead-removing technology, relative to a uniform standard. Distributionally, it is likely that the program was actually more responsive to the cost concerns of small refiners than a similar uniform standard would have been. The flexibility of the program likely increased the amount of violations, however, and added an unexpected monitoring and enforcement burden. On the other hand, one of the efficiency advantages of the incentive-based program is that it provided opportunities for unanticipated means of cost-effective compliance.lead phasedown, gasoline, tradable permit, market-based policy, technology adoption

Regulating Stock Externalities Under Uncertainty

Using a simple analytical model incorporating costs and benefits, stock decay, time discounting, and uncertainty, we uncover several important principles governing the choice of price-based policies (e.g., taxes) relative to quantity-based policies (e.g., tradeable permits) for controlling stock externalities. As in Weitzman (1974), the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities, with flatter marginal benefits and steeper marginal costs favoring prices. But we can say more. The relative slopes also help determine the optimal control path, with convergence to a steady state proceeding slowly as long as marginal benefits are relatively flat. On this basis we conclude that the conditions typically characterizing long-lived stock externalities—in particular, that the optimal control path involves long-term changes in the stock level—tend to favor price-based policies. While this result holds over a wide range of conditions, it depends on several key variables. Positive correlation of cost shocks across time, in particular, as well as low rates of time discounting and stock decay, will tilt the balance back toward quantity controls. These results are potentially applicable to a wide range of market failures involving stock externalities. In addition to the obvious application to stock pollutants, one can view species preservation, land-use policy, education, and research as areas where policymakers wish to regulate a stock-like externality. This analysis provides a useful framework for comparing alternative policy instruments for regulating such problems. Regarding climate change, for example, these results suggest that the use of tradeable emission permits rather than emission fees to slow growth in the stock of greenhouse gases is probably inefficient. Optimal policy would involve either tradeable permits that quickly stabilize the stock, or emission fees that gradually slow its growth.

A Tale of Two Market Failures: Technology and Environmental Policy

Market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies. These combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology. Both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives, and can be cost-effectively harnessed through the use of economicincentive based policy. In the presence of weak or nonexistent environmental policies, investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable. Positive knowledge and adoption spillovers and information problems can further weaken innovation incentives. While environmental technology policy is fraught with difficulties, a long-term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success.technology, research and development, environment, externality, policy