A Heated Debate

Kevin Lewis

October 29, 2009

A Panel Study of Nuclear Energy Consumption and Economic Growth

Nicholas Apergis & James Payne
Energy Economics, forthcoming

This study examines the relationship between nuclear energy consumption and economic growth for sixteen countries within a multivariate panel framework over the period 1980-2005. Pedroni's (1999, 2004) heterogeneous panel cointegration test reveals there is a long-run equilibrium relationship between real GDP, nuclear energy consumption, real gross fixed capital formation, and the labor force with the respective coefficients positive and statistically significant. The results of the panel vector error correction model finds bidirectional causality between nuclear energy consumption and economic growth in the short-run while unidirectional causality from nuclear energy consumption to economic growth in the long-run. Thus, the results provide support for the feedback hypothesis associated with the relationship between nuclear energy consumption and economic growth.


The Elusive Curse of Oil

Michael Alexeev & Robert Conrad
Review of Economics and Statistics, August 2009, Pages 586-598

Our goal is to show that contrary to the claims made in several recent papers, the effect of a large endowment of oil and other mineral resources on long-term economic growth of countries has been on balance positive. Moreover, the claims of a negative effect of oil and mineral wealth on the countries' institutions are called into question.


Assessing oil resources in the Middle East and North Africa

Roberto Aguilera
OPEC Energy Review, March 2009, Pages 47-69

Some energy experts are concerned that the world will soon face a global crisis to dwindling oil resources and a peak in production. This paper analyses the concern by estimating a cumulative supply curve for conventional oil in the Middle East and North Africa (MENA) region. It does so by attaching production costs to the endowment volumes of oil in the region, including volumes from provinces not previously assessed. A Variable Shape Distribution model is used to estimate the volumes of the previously unassessed provinces. The findings show that MENA oil should last far longer than some concerned experts claim. In addition, the production costs are lower than current market oil prices and significantly lower than prices observed in mid-2008.


Traffic Congestion and Infant Health: Evidence from E-ZPass

Janet Currie & Reed Walker
NBER Working Paper, October 2009

This paper provides evidence of the significant negative health externalities of traffic congestion. We exploit the introduction of electronic toll collection, or E-ZPass, which greatly reduced traffic congestion and emissions from motor vehicles in the vicinity of highway toll plazas. Specifically, we compare infants born to mothers living near toll plazas to infants born to mothers living near busy roadways but away from toll plazas with the idea that mothers living away from toll plazas did not experience significant reductions in local traffic congestion. We also examine differences in the health of infants born to the same mother, but who differ in terms of whether or not they were "exposed" to E-ZPass. We find that reductions in traffic congestion generated by E-ZPass reduced the incidence of prematurity and low birth weight among mothers within 2km of a toll plaza by 10.8% and 11.8% respectively. Estimates from mother fixed effects models are very similar. There were no immediate changes in the characteristics of mothers or in housing prices in the vicinity of toll plazas that could explain these changes, and the results are robust to many changes in specification. The results suggest that traffic congestion is a significant contributor to poor health in affected infants. Estimates of the costs of traffic congestion should account for these important health externalities.


World Oil: Market or Mayhem?

James Smith
Journal of Economic Perspectives, Summer 2009, Pages 145-164

"From 2004 to 2008, global demand increased by 33 percent, while non-OPEC supply decreased by 23 percent. Although OPEC members responded by increasing their production, they lacked sufficient capacity (after years of restrained oil field investments) to bridge the growing gap between global demand and non-OPEC supply...OPEC's decision to limit oil production by avoiding new capacity, rather than by holding existing capacity off the market, is shown by the fact that its crude oil production capacity (34 million barrels per day) is virtually unchanged from 1973 (U.S. EIA, 2008b, Table 3c), although the volume of its proved reserves - that is, known deposits that could have been tapped to expand capacity - doubled over that span (BP, 2008). Non-OPEC producers, working mostly in more-expensive and less-prolific petroleum areas, have expanded their production capacity by 69 percent since 1973. OPEC's installed production facilities are sufficient to extract just 1.5 percent of its proved reserves per year, which is another way of measuring the low intensity of development. Non-OPEC producers have installed facilities sufficient to extract 5.6 percent of their proved reserves each year (BP, 2008). OPEC accounted for only 10 percent of the petroleum industry's upstream capital investment during the past decade (Sandrea, 2006), although it produced nearly half of global output. By holding back, OPEC has effectively allowed secular growth in demand to absorb and eliminate its excess capacity, ceding market share to non-OPEC producers in the process. OPEC apparently reckoned that the risk of expanding low-cost capacity within the cartel exceeded the potential harm from expansion of high-cost capacity outside the cartel. OPEC recently initiated numerous projects to tap its underdeveloped reserves and finally expand capacity, investments that would amount to some $40 billion per year between 2008 and 2012 (OPEC, 2008a). That effort pales in comparison to the five largest international oil companies (the 'super-majors'), who collectively own just 3 percent of global oil reserves but according to SEC filings spent about $75 billion during 2007 to develop new production capacity. OPEC, with 20 times the reserves, spends only about half as much...The fact that OPEC (including Saudi Arabia) refrained from building capacity during 1973-2004, when oil prices stayed mostly below $50, is an important indicator of cartel discipline: individual incentives were seemingly set aside to support the common the short-run, price elasticities of supply and demand are extremely small, so that even seemingly small shocks may have large effects...The widespread belief that the futures market, bloated by speculative trading, dwarfs the size of the underlying physical market for oil is another misunderstanding...In the end, the distinction between hedging and speculative trading in the futures market is not important because neither one exerts any significant effect on current oil prices...The only avenue by which speculative trading might raise spot prices is if it incites participants in the physical market to hold oil off the market - either by amassing large inventories or by shutting in production...However, neither phenomenon was observed during the recent price spike...For the global oil market, the crucial insight is that while oil is constantly being 'used up,' the world is not 'running out' of oil (Adelman and Watkins, 2008)...we now extract a smaller fraction of remaining oil reserves each year than several decades ago...In the longer term, recent assessments by the International Energy Agency (2005) and Aguilera, Eggert, Lagos, and Tilton (2009) identify at least five trillion barrels - the equivalent of 160 years of current oil consumption - of unconventional petroleum resources in forms like heavy oil, oil sands, and oil shale that could eventually augment or supplant conventional crude oil at prices well below $100 per barrel. Thus, while oil prices may experience short-term peaks (and valleys), there is no geological reason to believe that oil prices are likely to plateau in the foreseeable future at or above the sky-high levels of mid-2008."


The Environment and Directed Technical Change

Daron Acemoglu, Philippe Aghion, Leonardo Bursztyn & David Hemous
NBER Working Paper, October 2009

This paper introduces endogenous and directed technical change in a growth model with environmental constraints and limited resources. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare, as a function of the degree of substitutability between clean and dirty inputs, environmental and resource stocks, and cross-country technological spillovers. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both "carbon taxes" and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values (corresponding to those used in existing models with exogenous technology) and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth. We also show that in a two-country extension, even though optimal environmental policy involves global policy coordination, when the two inputs are sufficiently substitutable environmental regulation only in the North may be sufficient to avoid a global disaster.


Do Environmental Regulations Impede Economic Growth? A Case Study of the Metal Finishing Industry in the South Coast Basin of Southern California

Ward Thomas
Economic Development Quarterly, November 2009, Pages 329-341

Air pollution emitted from firms and industries in the United States poses a significant threat to human health and the environment. Economists have traditionally opposed environmental regulations based on the argument that regulations reduce economic growth. Some scholars, however, have argued that polluting firms often adjust to environmental regulations through technological innovations that have the opposite effect. This study examines the effects of environmental regulations on economic growth through a case study of the metal finishing industry in the South Coast Basin of Southern California. The industry in the Basin has been regulated since 1988 by the South Coast Air Quality Management District (AQMD) as a result of the industry's use of hexavalent chromium. Based on a comparative analysis of the metal finishing industries in Chicago and Detroit, it appears that the AQMD regulations have not had a detrimental impact on the growth of the industry in the Basin.


Environmental Regulations and Corruption: Automobile Emissions in Mexico City

Paulina Oliva
University of California Working Paper, August 2009

This paper proposes a methodology for uncovering cheating with emission testing at smog-check facilities in Mexico City. I focus on a widespread form of cheating called emission substitution, which involves testing repeatedly and consecutively a low-emitting vehicle, or donor car, in order to provide low emissions for one or more cheating vehicles. Cheating can be identified because emission readings from the same vehicle have a lower variance than readings from different vehicles. In other words, readings from vehicles that appear to have been tested consecutively are closer than one would expect from random vehicle arrival to the center. This idea is formalized in non-parametric and parametric statistical tests. The results from both tests show that cheating occurs in nearly all centers.


U.S. Trade in Toxics: The Case of Chlorodifluoromethane (HCFC-22)

Randy Becker & John Tang
U.S. Census Bureau Working Paper, September 2009

This paper explores whether environmental regulation affects where pollution-intensive goods are produced. Here we examine chlorodifluoromethane (HCFC-22), a chemical designated as toxic in 1994 by the U.S. Environmental Protection Agency's Toxics Release Inventory (TRI). Trends show a decline in the number of domestic producers of this chemical, a decline in the number of manufacturing facilities using it, and an increase in the number (and share) of facilities claiming to import it. Transaction-level trade data show an increase in the import of HCFC-22 imports since its TRI listing - an increase that is faster than that of all non-TRI listed chemicals. This is suggestive of a pollution haven effect. Meanwhile, we find that the vast majority of U.S. imports of HCFC-22 come from OECD countries. However, an increase in the share of imports from non-OECD countries since the chemical's listing suggests a shift of production to countries with more lax environmental standards. While the findings here are suggestive of regulatory effects, more rigorous analyses are needed to rule out other possible explanations.


Unintended Consequences from Nested State & Federal Regulations: The Case of the Pavley Greenhouse-Gas-Per-Mile Limits

Lawrence Goulder, Mark Jacobsen & Arthur Van Benthem
NBER Working Paper, September 2009

Fourteen U.S. states recently pledged to adopt limits on greenhouse gases (GHGs) per mile of light-duty automobiles. Previous analyses predicted this action would significantly reduce emissions from new cars in these states, but ignored possible offsetting emissions increases from policy-induced adjustments in new car markets in other (non-adopting) states and in the used car market.Such offsets (or leakage) reflect the fact that the state-level effort interacts with the national corporate average fuel economy (CAFE) standard: the state-level initiative effectively loosens the national standard and gives automakers scope to profitably increase sales of high-emissions automobiles in non-adopting states. In addition, although the state-level effort may well spur the invention of fuel- and emissions-saving technologies, interactions with the federal CAFE standard limit the nationwide emissions reductions from such advances. Using a multi-period numerical simulation model, we find that 70-80 percent of the emissions reductions from new cars in adopting states are offset by emissions leakage. This research examines a particular instance of a general issue of policy significance - namely, problems from nested federal and state environmental regulations. Such nesting implies that similar leakage difficulties are likely to arise under several newly proposed state-level initiatives.


Trust between Regulators and the Regulated: A Case Study of Environmental Inspectors and Facility Personnel in Virginia

Michelle Pautz
Politics & Policy, October 2009, Pages 1047-1072

The relationships between environmental inspectors and the facility personnel at regulated firms are often presumed to be adversarial, and this assumption affects the design and implementation of environmental regulations. However, closer examination of these relationships challenges this fundamental assumption of adversarial relations in environmental policy. Interviews with 44 inspectors and regulated officials throughout Virginia found that the interactions between these two categories of actors are positive. Over 90 percent of the interviewees were positive about their interactions with one another, and inspectors and regulated officials alike indicate that they trust the other. These findings are compelling because they contest common assumptions, and, as such, they provoke debate regarding the fundamental notions concerning the interactions between regulators and the regulated on the frontlines of environmental regulation.


Household actions can provide a behavioral wedge to rapidly reduce U.S. carbon emissions

Thomas Dietz, Gerald Gardner, Jonathan Gilligan, Paul Stern & Michael Vandenbergh
Proceedings of the National Academy of Sciences, 3 November 2009, Pages 18452-18456

Most climate change policy attention has been addressed to long-term options, such as inducing new, low-carbon energy technologies and creating cap-and-trade regimes for emissions. We use a behavioral approach to examine the reasonably achievable potential for near-term reductions by altered adoption and use of available technologies in U.S. homes and nonbusiness travel. We estimate the plasticity of 17 household action types in 5 behaviorally distinct categories by use of data on the most effective documented interventions that do not involve new regulatory measures. These interventions vary by type of action and typically combine several policy tools and strong social marketing. National implementation could save an estimated 123 million metric tons of carbon per year in year 10, which is 20% of household direct emissions or 7.4% of U.S. national emissions, with little or no reduction in household well-being. The potential of household action deserves increased policy attention. Future analyses of this potential should incorporate behavioral as well as economic and engineering elements.


Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program

Lawrence Goulder, Marc Hafstead & Michael Dworsky
NBER Working Paper, August 2009

This paper examines the implications of alternative allowance allocation designs under a federal cap-and-trade program to reduce emissions of greenhouse gases. We focus on the impacts on industry profits and overall economic output, employing a dynamic general equilibrium model of the U.S. economy. The model's unique treatment of capital dynamics permits close attention to profit impacts. We find that the effects on profits depend critically on the method of allowance allocation. Freely allocating fewer than 15 percent of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Freely allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits. These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower than when all allowances are freely allocated and no auction revenue is generated. On the other hand, when auction proceeds are returned to the economy in lump-sum fashion (for example, as rebate checks to households), the potential cost-advantages of auctioning are not realized. Our results are robust to cap-and-trade policies that differ according to policy stringency, the availability of offsets, and the extent of opportunities for intertemporal trading of allowances.


Problems of Equity and Efficiency in the Design of International Greenhouse Gas Cap-and-Trade Schemes

Jason Scott Johnston
Harvard Environmental Law Review, 2009, Pages 405-430

This article argues that international greenhouse gas (GHG) cap-and-trade schemes suffer from inherent problems of enforceability and verifiability that both cause significant inefficiencies and create inevitable tradeoffs between equity and efficiency. A standard result in the economic analysis of international GHG cap and trade schemes is that an allocation of initial permits that favors poor, developing countries (making such countries net sellers in equilibrium) may be necessary not only to further redistributive goals but also the efficiency of the GHG cap and trade scheme. This coincidence of equity and efficiency is, however, unlikely to be realized under more realistic assumptions about enforcement and monitoring. Both economic theory and evidence from the European Union's emission trading scheme strongly suggest that under an international cap-and-trade scheme, high-marginal-cost GHG emission abaters will not face binding caps that are enforced against them by their national governments. The failure of such high-cost abaters to participate in cap-and-trade schemes causes significant inefficiencies. The prospect of enlisting the participation of such high-abatement-cost, developed-world GHG emitters and restoring efficiencies by opening up trading to include low-cost GHG abatement projects in the developing world is appealing, but ultimately doomed by the inability to verify that such developing world projects generate real GHG emission reductions. Due to inherently imperfect and limited verifiability, there is an inevitable tradeoff between efficiency and equity: the broader the coverage of an international GHG cap-and-trade scheme, the greater its potential to redistribute income to people in poor countries, but the less likely it is to efficiently generate reductions in GHG emissions.


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