Monday, May 30, 2011

New NBER Research on Environmental Economics

These are exciting days to be an environmental economist.  Here I would like to offer three recent examples of new research that I find interesting and I didn't even write any of these papers!

Paper #1:   Studies the economic costs of states adopting a Renewable Portfolio Standard for electricity power generation.  As states such as California embrace aggressive (33% RPS!) standards, how much more costly will it be for power generators to supply power? How risky will such wind and solar reliance be?  These guys present a rigorous framework for studying this issue and show there better be significant learning by doing effects for renewable power generators in order for this policy to not have serious unintended consequences.

Paper #2:    Many "consequences of climate change" studies implicitly assume that the average forecast of the future impacts of climate change will actually be the true impacts but climate change's future impact is a random variable with a mean and a variance.  Martin Weitzman has made great progress on this point.   The new NBER paper predicts likely climate change impacts for agriculture in Africa when it incorporates that there are a range of possible climate forecasts in the future.  Intuitively, if there is a "nasty, a moderate, and a nice" possible climate impacts --- we need to know what will be the agriculture outcomes in the future for farmers in each of these three scenarios.  Simply calculate the average (nasty + moderate + nice)/3  and asking how farmers will cope with this "average" future climate is not that interesting if farmer profits are highly non-linear functions of future climate conditions.  The authors predict a very large prediction interval.

A major point of my Climatopolis book is to ask whether those who will be affected by climate change such as  farmers in Africa anticipate the worst case scenarios?  If they do, then they have strong incentives to take actions now (switching crops, investing in different strategies) to reduce their risk exposure. The net effect of this "small ball" is the worst case predictions made by these authors will overstate the impacts because their paper has helped to change rational actors' choices!     You have to admit that it will be ironic but useful when research (by inducing a Hawthorne effect) leads to over-stated predictions because it helped to stimulate precautionary investment!

Paper #3:  Investigates who will actually bear the costs of carbon pricing.  Basic economics tells us that those who can't substitute away from goods that are now taxed will end up facing higher prices due to the carbon pricing.  

As you can see, there is a whole interesting set of research being done that is far removed from the macro economy and yelling about budget deficits.