Published December 8, 2015 by Evan Hernstadt and Erich Muehlegger.

View the abstract.Return to the Papers listing. | Download the paper.

A large and growing literature documents the adverse impacts of pollution on health, productivity, educational attainment and socioeconomic outcomes. This paper provides the first quasi-experimental evidence that air pollution casually affects criminal activity. We exploit detailed location data on over two million serious crimes reported to the Chicago police department over a twelve-year period. We identify the causal effect of pollution on criminal activity by comparing crime on opposite sides of major interstates on days when the wind blows orthogonally the direction of the interstate and find that violent crime is 2.2 percent higher on the downwind side. Consistent with evidence from psychology on the relationship between pollution and aggression, the effect is unique to violent crimes – we find no effect of pollution on the commission of property crime.

Published August 25, 2015 by David Rapson.

View the abstract.Return to the Papers listing | Download the paper.

U.S. programs subsidize electric vehicles (EVs) in part to reduce greenhouse gas (GHG) emissions. We model a suite of life cycle GHG emissions considerations to estimate the GHG abatement potential from switching from an internal combustion engine vehicle (ICE) to an EV in the continental U.S. The GHG intensity of EVs hinges on the electricity and ambient temperature when charged and operated. Both have high spatial and temporal heterogeneity, yet are typically modeled inadequately or overlooked entirely. We calculate marginal emissions, including renewables, for electricity by region and test forecasted grid composition to estimate future performance. Location and timing of charging are important GHG determinants, but temperature effects on EV performance can be equally important. On average, EVs slightly reduce GHGs relative to ICEs, but there are many regions where EVs provide a decisive benefit and others where EVs are significantly worse. The forecasted grid shifts from coal towards renewables, improving EV performance; the GHG benefit per EV in western states is roughly $425 today and $2400 in 2040.

Published July 1, 2015 by Aaron Smith.
View the abstract.Return to the Papers listing | Download the paper.

US legislation passed in 2007 (RFS2) increased by about 1.3 billion bushels the net amount of corn required to be processed annually into ethanol for motor-fuel use. Using modern time-series methods, we estimate that corn prices were about 30 percent higher between 2006 and 2014 than they would have been but for RFS2 and if pre-2006 trends had continued. We estimate a permanent corn demand increase of 1.3 billion bushels increased the long-run price by 31% (90% confidence interval is [5%,95%]). Our identification strategy is unique in the literature because it enables estimation of the effects of transitory shocks, such as weather, separately from the effects of persistent shocks, such as the ethanol mandate.

Published June 1, 2015 by Jacob Humer and James Bushnell.
View the abstract.Return to the Papers listing. | Download the paper.

The imposition of environmental regulations, such as greenhouse gas charges, to domestic manufacturing traditionally creates concerns over the impacts of those regulations on international competition and downstream product prices. The US Nitrogen fertilizer industry, an energy-intensive trade-exposed industry, has been considered by conventional metrics to be one of the most vulnerable to such effects. Since 2010 the industry has undergone increased concentration of producers and a dramatic reduction in US natural gas prices. While the decline in domestic gas prices has reduced production costs, it has not produced a corresponding decrease in fertilizer prices. Our research establishes that the pass-through of changes in natural gas prices, a key input to nitrogenous fertilizer, declined from roughly 80% prior to 2010 to effectively zero through 2014. One implication of this change in pricing dynamics is that the imposition of greenhouse gas (GHG) regulations on producers of nitrogen fertilizers would have almost no impact on fertilizer prices. Within the context of a GHG cap-and-trade program, the allocation of emissions allowances as considered under proposed Federal legislation, and as practiced in California today, would likely result in a transfer to fertilizer producers on the order of hundreds of millions of dollars with no impact on fertilizer prices or emissions.

Published May 3, 2015 by Jeremy B. Smith.
View the abstract.Return to the Papers listing. | Download the paper.

The smart grid offers a wide array of opportunities to improve efficiency of the electricity grid via load management policies. This chapter reviews the current state of knowledge in the economics literature as it relates to time-varying pricing and to behavioral interventions, which together comprise a large portion of regulators’ policy choice set. The authors present evidence that consumers respond to financial incentives, but that these are not the only determinants of behavior. For example, consumers are often uninformed and inattentive, and exhibit a tendency to respond to non-monetary incentives as well as monetary. The authors conclude that time-varying pricing is an effective and essential policy instrument, while instruments designed to boost customer attentiveness and allow households to become better informed about their energy use play an important complementary role. Smart meters are crucial in making such a policy package feasible. The power of randomized experimental designs, which underlie much of the evidence that is presented, is also discussed. The authors highlight important areas for future research, and recommend that such future research efforts continue to leverage randomized designs.

Published April 29, 2015 by Kevin Novan.
View the abstract.Return to the Papers listing. | Download the paper.

In an effort to reduce pollution from the electricity sector, governments are heavily subsidizing renewables. The subsidies, however, are not being used in isolation. Instead, they are often provided in regions where certain pollutants are regulated by cap-and-trade programs. I demonstrate that, when combined with a cap-and-trade program, renewable subsidies can cause an undesirable outcome – they can increase emissions of unregulated pollutants. Focusing on the region regulated by the Clean Air Interstate Rule, I show that, if the EPA sets a binding cap on NOX , expanding renewable capacity not only offsets zero tons of NOX , it will increase SO2 emissions.

Published March 17, 2015 by David Rapson.
View the abstract.Return to the Papers listing. | Download the paper.

This paper is the first to evaluate the impact of a large-scale field deployment of mandatory time-of-use (TOU) pricing on the energy use of commercial and industrial firms. The regulation imposes higher user prices during hours when electricity is generally more expensive to produce, and is the most common way for time-varying incentives to be transmitted to retail electricity customers. We exploit a natural experiment that arises from the rules governing the program to present evidence that TOU pricing induced negligible change in overall usage, peak usage or peak load. As such, economic efficiency was not increased by this regulation. Bill levels and volatility exhibit only minor shifts, suggesting that concerns from advocacy groups about increased expenditure and customer risk exposure have been overstated.

Published May 7, 2015 by Aaron Smith.
View the abstract.Return to the Papers listing. | Download the paper.

The Renewable Fuel Standard (RFS2) is a US federal policy that mandates large increases in biofuel consumption and is implemented using a market for tradeable compliance credits. We develop a dynamic model of compliance with the RFS2 in which firms face uncertainty about future relative fuel prices and future enforcement of the mandate. Our model shows how changes in expected future enforcement can have dramatic effects on the price of compliance credits and thereby have large effects on the current cost of compliance. To illustrate, we estimate empirically the effect of three ‘policy shocks’ that reduced the expected 2014 mandates and introduced significant uncertainty regarding future compliance schedules. We estimate that one shock, the release of the 2013 Final Rule in which the Environmental Protection Agency suggested it would likely reduce the 2014 mandate, decreased the value of the subsidy (tax) provided by the RFS2 to the biofuel (fossil fuel) industry in 2013 by nearly $8 billion. Similar shocks followed with two subsequent events that released preliminary versions of the 2014 mandate reductions. We conclude that the goals of the RFS2 would be better served through active management of compliance credit markets.

Published December 2, 2014 by James B. Bushnell.
View the abstract.Return to the Papers listing. | Download the paper.

Flexibility in environmental regulations can lead to reduced costs if it allows additional abatement from lower cost sources or if policy tailoring and experimentation across states increases regulatory efficiency. The EPA’s 2014 Clean Power Plan, which implements greenhouse gas regulation of power plants under the Clean Air Act, allows substantial regulatory flexibility. The Clean Power Plan sets state-level 2030 goals for emissions rates (in lbs CO2 per MWh) with substantial variation in the goals across states. The Clean Power Plan allows states considerable flexibility in attaining these goals. In particular, states can choose whether to implement the rate-based goals or equivalent mass-based goals (i.e., emissions caps). Moreover, states can choose whether or not to join with other states in implementing their goals. Using a model of electricity generation across states, we analyze incentives to adopt inefficient rate-based standards versus efficient mass-based standards. We show that adoption of inefficient rate-based standards is a dominant strategy for states from both a consumer’s and a generator’s perspective. We calibrate the model for electricity markets in the Western United States and calculate significant inefficiencies from a failure to coordinate. In particular, state-by-state rate-based standards result in a substantial loss of welfare relative to business as usual. Even a harmonized West-wide rate-based standard dissipates a substantial proportion of the potential gains from regulation. Despite these large inefficiencies, the incentives for adoption of the inefficient policies are substantial particularly for generators.

Published September 1, 2014 by James Bushnell.
View the abstract.Return to the Papers listing. | Download the paper.

Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated, monopoly utilities that handled electricity generation, transmission, local distribution and billing/collections. Regulators set retail electricity prices to allow the utility to recover its prudently incurred costs, a process known as cost-of-service regulation. During the 1990s, this model was disrupted in many states by “electricity restructuring,” a term used to describe legal changes that allowed both non-utility generators to sell electricity to utilities – displacing the utility generation function and/or “retail service providers” to buy electricity from generators and sell to end-use customers – displacing the utility procurement and billing functions. We review the original economic arguments for electricity restructuring, the potential winners and losers from these changes, and what has actually happened in the subsequent years. We argue that the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers. In reality, the electricity rate changes since restructuring have been driven more by exogenous factors – such as generation technology advances and natural gas price fluctuations – than by the effects of restructuring. We argue that a similar dynamic underpins the current political momentum behind distributed generation (primarily rooftop solar PV) which remains costly from a societal viewpoint, but privately economic due to the rent transfers it enables.