Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market

Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.

The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations

Rather than allowing water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, like the curtailment of certain uses, primarily outdoor watering. Using unique panel data on residential end-uses of water, we examine the welfare implications of typical drought policies. Using price variation across and within markets, we identify end-use specific price elasticities. Our results suggest that current policies target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that use restrictions have costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water.

The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations

Rather than allowing water prices to reflect scarcity rents during periods of drought-induced excess demand, policy makers have mandated command-and-control approaches, like the curtailment of certain uses, primarily outdoor watering. Using unique panel data on residential end-uses of water, we examine the welfare implications of typical drought policies. Using price variation across and within markets, we identify end-use specific price elasticities. Our results suggest that current policies target water uses that households, themselves, are most willing to forgo. Nevertheless, we find that use restrictions have costly welfare implications, primarily due to household heterogeneity in willingness-to-pay for scarce water.

Measuring Welfare in Restructured Electricity Markets

Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.

Upstream versus Downstream Implementation of Climate Policy

This chapter examines the tradeoffs of regulating upstream (e.g., coal, natural gas, and refined petroleum product producers) versus regulating downstream (e.g., direct sources of greenhouse gases (GHG)). In general, regulating at the source provides polluters with incentives to choose among more opportunities to abate pollution. This chapter develops a simple theoretical model that shows why this added flexibility achieves the lowest overall costs. I broaden the theory to incorporate several reasons why these potential gains from trade may not be realized--transactions costs, leakage, and offsets--in the context of selecting the vertical segment of regulation.

Profiting from Regulation: An Event Study of the EU Carbon Market

We investigate the effect of cap-and-trade regulation of CO2 on firm profits by performing an event study of a CO2 price crash in the EU market. We examine returns for 90 stocks from carbon intensive industries and 600 stocks in the broad EUROSTOXX index. Firms in carbon intensive, or electricity intensive industries, but not involved in international trade were most hurt by the event. �This implies investors were focused on product price impacts, rather than compliance costs. We find evidence that firms’ net allowance positions also strongly influenced the share price response to the decline in allowance prices.Emissions Markets; Incidence of Taxation; Event Study

Profiting from Regulation: An Event Study of the EU Carbon Market

Tradable permit regulations have recently been implemented for climate change policy in many countries. One of the first mandatory markets was the EU Emission Trading System, whose first phase ran from 2005-07. Unlike taxes, permits expose firms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered permits. In this paper, we examine the effect of this type of environmental regulation on profits. In particular, changes in permit prices affect: (1) the direct and indirect input costs, (2) output revenue, and (3) the carbon permit asset value. Depending on abatement costs, output price sensitivity, and permit allocation, these effects may vary considerably across industries and firms. We run an event study of the carbon price crash on April 25, 2006 by examining the daily stock returns for 90 stocks from carbon intensive industries and approximately 600 stocks in the broad EUROSTOXX index. In general, firms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in permit prices. In industries that were known to be net short of permits, the cleanest firms saw the largest declines in share value. In industries known to be long in permits, firms granted the largest allocations were most harmed.

Costly Blackouts? Measuring Productivity and Environmental Effects of Electricity Shortages

In many countries, unreliable inputs, particularly those lacking storage, can significantly limit a firm's productivity. In the case of an increasing frequency of blackouts, a firm may change factor shares in a number of ways. It may decide to self generate electricity, to purchase intermediate goods that it used to produce directly, or to improve its technical efficiency. We examine how industrial firms responded to China's severe power shortages in the early 2000s. Fast-growing demand coupled with regulated electricity prices led to blackouts that varied in degree over location and time. Our data consist of annual observations from 1999 to 2004 for approximately 32,000 energy-intensive, enterprises from all industries. We estimate the losses in productivity due to factor-neutral and factor-biased effects of electricity scarcity. Our results suggest that enterprises re-optimize among factors in response to electricity scarcity by shifting from energy (both electric and non-electric sources) into materials---a shift from "make" to "buy." These effects are strongest for firms in textiles, timber, chemicals, and metals. Contrary to the literature, we do not find evidence of an increase in self generation. Finally, we find that these productivity changes, while costly to firms, led to small reductions in carbon emissions.

Vertical Targeting and Leakage in Carbon Policy

This paper examines the intersection between two aspects of climate policy design. The first is the point of regulation: should it be placed on pollution sources, carbon-rich inputs, or consumers? The second aspect concerns the external effects of a local climate policy. Leakage occurs when partial regulation results in an increase in emissions in unregulated parts of the economy. Our model demonstrates how directly regulating polluters can increase foreign emissions while indirect regulation (either upstream or downstream of the pollution source) will decrease foreign emissions. The net effect on combined domestic and foreign emissions will depend on market elasticities

How Do Energy Prices, and Labor and Environmental Regulations Affect Local Manufacturing Employment Dynamics? A Regression Discontinuity Approach

Manufacturing industries differ with respect to their energy intensity, labor-to-capital ratio and their pollution intensity. Across the United States, there is significant variation in electricity prices and labor and environmental regulation. This paper uses a regression discontinuity approach to examine whether the basic logic of comparative advantage can explain the geographical clustering of U.S. manufacturing. Using a unified empirical framework, we document that energy-intensive industries concentrate in low electricity price counties, labor-intensive industries avoid pro-union counties, and pollution-intensive industries locate in counties featuring relatively lax Clean Air Act regulation. We use our estimates to predict the likely jobs impacts of regional carbon mitigation efforts.