Environmental and Energy Policy and the Economy

There is widespread agreement among economists—and a diverse set of other policy analysts—that at least in the long run, an economy-wide carbon-pricing system will be an essential element of any national policy that can achieve meaningful reductions of CO₂ emissions cost-effectively in the United States. There is less agreement, however, among economists and others in the policy community regarding the choice of specific carbon-pricing policy instrument, with some supporting carbon taxes and others favoring cap-and-trade mechanisms. This prompts two important questions: How do the two major approaches to carbon pricing compare on relevant dimensions, including but not limited to efficiency, cost-effectiveness, and distributional equity? And which of the two approaches is more likely to be adopted in the future in the United States? This paper addresses these questions by drawing on both normative and positive theories of policy instrument choice as they apply to US climate change policy and draws extensively on relevant empirical evidence. The paper concludes with a look at the path ahead, including an assessment of how the two carbon-pricing instruments can be made more politically acceptable.

In many countries, the revenue from gasoline taxes is used to fund highways and other transportation infrastructure. As the number of electric vehicles on the road increases, this raises questions about the effectiveness and equity of this financing mechanism. In this paper, we ask whether electric vehicle drivers should pay a mileage tax. Though the gasoline tax has been traditionally viewed as a benefits tax, we instead take the perspective of economic efficiency. We derive a condition for the optimal electric vehicle mileage tax that highlights a key trade-off. On the one hand, there are externalities from driving, including traffic congestion and accidents, that imply a mileage tax is efficient. On the other hand, gasoline tends to be underpriced, so a low (or even negative) mileage tax might have efficiency benefits in encouraging substitution away from gasoline-powered vehicles. We then turn to an empirical analysis aimed at better understanding the current policy landscape for electric vehicles in the United States. Using newly available, nationally representative microdata, we calculate that electric vehicles have reduced gasoline tax revenues by $250 million annually. We show that the forgone tax revenue is highly concentrated in a handful of states and is highly regressive, as most electric vehicles are driven by high-income households, and we discuss how this motivates and informs optimal policy.

This paper studies green bonds, a relatively new instrument in sustainable finance. I first describe the market for green bonds and characterize the “green bond boom” witnessed in recent years. Second, using firm-level data on green bonds issued by public companies, I examine companies’ financial and environmental performance following the issuance of green bonds. I find that the stock market responds positively to the announcement of green bond issues. Moreover, I document a significant increase in environmental performance, suggesting that green bonds are effective in improving companies’ environmental footprint. These findings are only significant for green bonds that are certified by independent third parties, suggesting that certification is an important governance mechanism in the green bond market. I conclude by discussing potential implications for public policy.

Fuel-economy standards for new vehicles are a primary policy instrument in many countries to reduce the carbon footprint of the transportation sector. These standards have many channels of costs and benefit, affecting sales, composition, vehicle attributes, miles traveled, and externalities in the new-car fleet, as well as the composition and size of the used fleet. We develop a tractable analytical framework to examine the welfare effects of fuel-economy standards and apply it to the recent government proposal to roll back fuel-economy standards. We find that our combined, multimarket vehicle-choice model implies that the proposal would increase the size of the vehicle fleet over time and generates smaller welfare gains than models with a less rich structure of the vehicle market, such as the one used in the analysis associated with the 2018 Notice of Proposed Rulemaking (NPRM) announcement. The disparities across the two models appear to result from the absence of feedback effects in the NPRM analysis. We stress the importance of instead using a multimarket vehicle-choice model to provide the most accurate predictions of costs and benefits. We also derive bounds that can serve as a check on the theoretical consistency of such analyses and that offer insights into the magnitudes of potential errors resulting from imperfect multimarket integration.

This paper estimates an augmented measure of national output inclusive of environmental pollution damage in the US economy over a 60-year period. The paper reports two primary findings. First, air pollution intensity declined precipitously from the 1950s to the modern era. Air pollution damage comprised roughly 30% of output in the post–World War II economy, declining to under 10% in 2016. Second, accounting for pollution damage significantly affects growth rates.

Prior to the passage of the Clean Air Act in 1970, gross domestic product outpaced environmentally adjusted value added (EVA), defined as GDP less air pollution damage. Following passage of the act, EVA grew more rapidly than GDP. Macroeconomic and environmental policies, as well as the business cycle, appreciably affect damages and EVA growth.

Political debates about environmental regulation often center around the effect of policy on jobs. Opponents decry the “job-killing” Environmental Protection Agency (EPA) and proponents point to “green jobs” as a positive policy outcome. Beyond the political debates, Congress requires the EPA to evaluate “potential losses or shifts of employment” that regulations under the Clean Air Act may cause. Yet there is a sharp disconnect between the political importance of the jobs question and the limited research on the job effects of policy and general skepticism in the academic literature about the importance of those job effects for the costs and benefits of environmental regulation.

In this paper, we discuss how the existing research on jobs and environmental regulations often falls short in evaluating these questions and consider recent new work that has attempted to address these problems. We provide an intuitive discussion of key questions for how job effects should enter into economic analysis of regulations. And, using an economic model that incorporates labor market frictions, we evaluate a range of environmental regulations in both the short and long run to develop a set of key stylized facts related to jobs and environmental regulations and to identify the key questions that current models cannot yet answer well.