ECO208 review Questions week 10-15

What is the Porter Hypothesis? How does it differ from the standard view of the impact of regulation on the economy? What does the empirical evidence say about which of these views is a more accurate reflection of reality?

"Strict environmental regulations do not inevitably hinder competitive advantage against foreign rivals; indeed, they often enhance it" (Porter, 1991). • Regulation triggers innovation. • Provides information to firms about likely inefficiencies. • Reduces uncertainty that investments in reducing pollution will be profitable. • Helps firms overcome organizational inertia. • Predicated on idea that firms are missing profitable opportunities. Evidence: Some positive evidence of link between regulation and R&D expenses / patents. • Mixed evidence for a link between regulation and business performance (as measured by productivity). • Research suggests that for OECD countries costs to firms of complying with regulations have been small.

According to Robert Stavins and Sheila Olmstead, what are the three key elements of an effective international climate change policy architecture?

1 A means to ensuring that key industrialized and developing nations are involved in differentiated but meaningful ways. 2 An emphasis on an extended time path to targets. 3 Inclusion of flexible, market-based policy instruments.

What are the five stages of a contingent valuation analysis?

1. Define the hypothetical market. Define the commodity (good/service) that is being valued. 2. Obtain bids. - What mode should be used to collect the data? - What data should be collected? - How should respondents be asked to state WTP/WTA? 3. Estimate mean WTP. How to translate WTP upper/lower bounds into an estimate of mean WTP? 4. Aggregate the data. • How to translate the mean bid of our surveyed sample to a total population figure? 5. Validate estimates. Scope tests: • Does WTP vary significantly with level of environmental quality Q? Is it monotonically increasing in Q? • Convergent validity: • Do WTP estimates from different approaches yield similar results when both are applied to measure value of the same good? • E.g., phone survey vs. internet survey, stated vs. revealed preference. • Construct validity: • Does WTP vary in manner consistent with expectations? e.g. Does WTP increase with income?

In class, we saw two examples of perspectives on sustainability. What were they? According to each perspective, are growth and sustainability compatible? Why / why not? What fundamental assumptions does each perspective make about the world?

1. The "Limits to Growth" perspective. Growth and sustainability incompatible. • Growth has to cease or resource constraints will be hit and the system will collapse. Assumptions: • Continued exponential economic growth. • Fixed stocks of non-renewable resources. • Pessimistic views of: 1. Substitutability between non-renewables and other inputs. 2. Adaptation by the world's physical, economic, social, and political institutions. 3. Technological change. __________________________________________________________________________ 2. The "economist's perspective" (Solow, 1991). Leaving future generations "the capacity to be as well off as we are today." • Sustainability about distributional equity between generations (intergenerational Pareto efficiency). Takes a very sanguine view of technological change, the substitutability of inputs, and responses by political and economic systems. • Scarcity increases prices. =⇒ Firms and consumers respond to long-term price signals by reducing use, technological innovation, etc.

What is the "Environmental Kuznet's Curve?" What is its shape, and what are the key determinants of its shape? Of these factors, which has been argued to be the most important?

Among these factors, studies show regulation is the dominant factor in explaining why pollution falls as countries grow beyond middle-income status. • In the absence of regulation, growth alone appears to increase pollution. • Although pollution per unit of output falls ... • Economic liberalization leads to elimination of subsidies to heavy industry and energy sectors, lowering pollution. • Firms operate at more efficient scales

What was the Berlin Mandate? How did its incorporation into the Kyoto Protocol affect the success of that agreement?

Annex I (OECD+/-) countries will commit to targets and timetables for emission reductions, but no commitments for other countries. the kyoto protocol Fulfilled Berlin Mandate with targets for Annex I countries only.

Why is international or even global cooperation necessary to deal with climate change?

Climate change is a global commons problem. the benefits (averted climate change) are distributed globally. Hence, for virtually any jurisdiction, the benefits it reaps from its actions will be less than the costs it incurs. ...despite the fact that the global benefits may be greater possibly much greater than the global costs. This presents a classic free-rider problem. I ...which is why international, if not global, cooperation will be essential.

What does emissions "leakage" refer to the context of climate change? Why does it matter for the design of policies / agreements to mitigate climate change?

Developing countries had no commitments in KP. Potential for "emissions leakage" as production shifts to nations with non-binding targets.

How does the "cost of illness" method work? What are some of the limitations of this approach?

Direct health care costs + indirect loss of work time. • Could significantly underestimate WTP. • Why? What's left out? • Not a reliable method, but frequently used. • May provide a lower bound

What are some of the known problems with CV analyses? What is the "warm glow" effect? Why is it an issue that, in a CV study, individuals are typically asked to make voluntary payments for public goods?

Known problems: 1. Hypothetical market bias. 2. Warm glow effect. 3. Sensitivity to choice of response mode. 4. Information provision matters. 5. Voluntary vs. non-voluntary payments for public goods (free-riding). 6. Strategic bias. 7. Insensitivity to "scope" (and "embedding") Warm glow: People "purchase moral satisfaction" with big, unrealistic answers. • Example: Seip & Strand (1992): • 63% from Norwegian study WTP 200 Kroner to NGO. • NGO followed up with mail solicitation and fewer than 10% contributed! • CV usually involves voluntary payments for public goods. • Tendency to free-ride =⇒ people understate their WTP.

What is the Kyoto Protocol? What were some of the strengths and weaknesses of the Kyoto protocol? How is the Paris agreement different?

Kyoto Protocol: First significant multinational attempt to curb GHG emissions. strengths: Inclusion of provisions for market-based approaches. I Emissions trading among Annex I countries (but not among firms?). I Clean Development Mechanism (CDM). Flexibility for (Annex I) countries to meet targets any way they chose (domestic sovereignty). Appearance of fairness? (common but differentiated responsibilities) Weakness: Developing countries had no commitments in KP. Not fair? I Fifty of the non-Annex I countries now have greater per capita income than poorest of Annex I.

Why are in-person interviews considered to be a superior method of collecting data for a contingent valuation study relative to telephone, mail, or internet surveys?

Most reliable. Pro: most scope for detailed questions, ability to control flow of information. Con: costly. More potential for yea-saying (socially acceptable answers).

How does the "averting behavior" method work? What are some of the limitations of this approach?

People change behavior to avoid or lessen risks. • We can infer WTP for small reductions in risk from their expenditures on risk averting activities. • Examples? • Helmets (bicycle, motorcycle). • Bottled water. • Water filters (e.g., Brita). Limitations: Actions based on perceived benefits not objective benefits. (consumers may overestimate or under estimate their risk Difficult to separate risk-reduction benefits from other benefits. • E.g. filtered water may taste better. Difficult to separate risk-reduction benefits from other costs. • E.g. people don't wear helmet because they are uncool.

Compare and contrast revealed and stated preference. Broadly speaking, what are the relative advantages and disadvantages of each?

RP: infer WTP from actual behavior. • Omitted variable / selection bias: -• Can only value environmental g/s directly related to the price of a marketed good. SP: infer WTP from hypothetical responses to survey questions. • WTP based on hypotheticals not actual behavior. -Only valuation method that can be used to estimate non-use value.

What types of values can revealed preference (RP) methods measure? What is the basic idea behind RP methods?

Revealed preference methods can only measure use value • Use value: direct enjoyment or consumption of an environmental good. (swimming in a lake) • Non-use value: derives from existence of environmental good but not its direct use. (endangered species) • Idea: • Use observed consumer behavior in related markets to infer their WTP for environmental goods and services.

Explain the temporal (time) aspect of climate change and how this aspect matters for the policy response to climate change.

Scientifically: Atmospheric lifetimes of most GHGs: decades to a century or more. This is a stock, not flow environmental problem. Administratively: Creation of durable international institutions is essential. International climate negotiations will be an ongoing process not a single task with a clear end-point.

What do scope, convergent validity, and construct validity refer to?

Scope tests: • Does WTP vary significantly with level of environmental quality Q? Is it monotonically increasing in Q? • Convergent validity: • Do WTP estimates from different approaches yield similar results when both are applied to measure value of the same good? • E.g., phone survey vs. internet survey, stated vs. revealed preference. • Construct validity: • Does WTP vary in manner consistent with expectations? e.g. Does WTP increase with income?

Among the various methods of eliciting WTP/WTA in a CV study, which is considered to be the "gold standard," and why?

Single bounded dichotomous choice:A single payment amount is suggested. Respondents say "yes" or "no". • Recommended by NOAA in 1993, so became gold standard. • Pro: Looks like voting on provision of public good, familiar. • Con: "Yea-saying" & requires a lot of data, which is costly.

What are the "Pollution Haven Hypothesis" and the "Pollution Haven Effect?"

Strict regulation causes firms to relocate production to countries with weaker regulation. (Pollution Haven Hypothesis) Regulation causes lower net trade flows. (Pollution Haven Effect)

Should we expect market forces alone to lead us to stop consuming fossil fuels? Discuss both supply and demand factors.

Supply: I No evidence that we are running out of fossil fuels. I To the contrary, technological improvements have dominated the effects of resource depletion, vastly increasing the economic/technical feasibility of resource extraction. Demand: I Despite significant recent decrease in cost, solar remains uncompetitive with natural gas (wind is closer). I Because of this and many factors (e.g., intermittency), absent economical storage, renewables unlikely to be well-suited to baseload generation. I Significant technological improvements required for EVs to be cost-competitive with gasoline vehicles. Conclusion: Neither supply nor demand factors will reduce our use of fossil fuels signicantly on their own.

How did Solow define sustainability? What are the fundamental features of his definition? How does this definition differ from "strong" sustainability?

Takes a broader view of the global capital stock: human, physical, natural. All are assumed to be interchangeable to some degree. - Environmental amenities are just like any other assets. - Does not refer to any specific resource. • Takes a very sanguine view of technological change, the substitutability of inputs, and responses by political and economic systems. - Scarcity increases prices. Firms and consumers respond to long-term price signals by reducing use, technological innovation, etc. • Implementation requires us to replace depleted natural capital with other forms to maintain the overall stock. - "Green accounting" & "Green Net National Product

What is the "social cost of carbon?" How can it be used in practice?

The monetized damages associated with an incremental increase in carbon emissions, generally referred to as the social cost of carbon (SCC). In practice: U.S. Department of Transportation-EPA standards for GHG emissions and fuel eciency for light-duty vehicles in model years 20122016 (U.S. EPA 2010). The upfront technology costs of the GHG rule for light-duty vehicles were estimated to be approximately $350 billion (in 2007 dollars).

True/False. The value of a statistical life refers to the amount that the average individual would pay to avoid certain death this year. Explain.

VSL is not what an individual would pay to avoid (certain) death this year, or the compensation an individual would require to accept (certain) death this year. VSL is the amount that a large number of similar people would together pay to eliminate a risk expected to kill one of them randomly this year.

What is the basic intuition for how the travel cost method (a recreation demand method) works?

combine a private good with an environmental good to produce another good, which is the real source of utility. EX: travel + license + pristine lake = recreational fishing day.

What are the practical difficulties of implementing the economist's definition of sustainability? Why is measurement important? Why is it challenging? Why are existing measures insufficient? Why might a global (rather than national) measure be needed?

difficulties: 1. The problem of uncertainty. • Future generations' tastes/preferences. • Technological change / input substitutability. 2. Measurement issues. • How to keep track of human + physical + natural capital stock? • Necessary for achieving intergenerational Pareto efficiency. existing measures insufficient? (GDP) insufficient. • Exclude environmental services (clean air and water) and natural resource stocks (coal, oil, forests, and fish) national level may not be sufficient. • Exclude value of global commons (oceans, stratospheric ozone, upper atmosphere). • Exclude depletion of resources through trade. • Global Green NNP may be necessary

Scarcity is not just a physical phenomenon. Explain.

scarcity Has both economic and physical dimensions. • Economic: • Marginal extraction cost (technology) • Market value (available substitutes) • Physical: • Geologic availability

Can depleting the world's oil/coal/gas reserves be sustainable? Under what definition of sustainability might this be sustainable? Given that definition, what steps must be taken to ensure that the depletion of natural resources is done sustainably?

see last card

Explain how/why sustainability involves a trade-off between inter-generational and intra-generational equity.

• A dollar spent today on conservation benefits future generations but is also a dollar we cannot spend lifting the impoverished out of poverty today. • Reducing CO2 emissions means less money to alleviate poverty in DCs. The main beneficiaries will be future residents of those same DCs, who will likely be wealthier (Schelling's Paradox).

The reserves-to-production ratio for many non-renewable resources has been increasing rather than decreasing in recent years. Why?

• If 1980 number was accurate, we would have run out of oil in 2008! • If resources are truly finite, why does the line rise over time? Newly discovered reserves. • Newly "economic" reserves as price increases. • Alberta tar sands: economically viable only when crude oil prices exceed $35 per barrel. • Technological innovation (e.g. hydraulic fracturing, ...)

What is the basic intuition for how the hedonic pricing method works? Give examples of the types of products that are amenable to a hedonic pricing analysis. What are some of the limitations of the hedonic property pricing method?

• The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides. For example, the price of a car reflects the characteristics of that car—transportation, comfort, style, luxury, fuel economy, etc. Therefore, we can value the individual characteristics of a car or other good by looking at how the price people are willing to pay for it changes when the characteristics change. Examples:• Housing price affected by attributes of structure, neighborhood, and environment. • Wage affected by worker and job characteristics (e.g., risk of fatal injury). Limitations: -Omitted variable / selection bias: • Individuals differ in their (unobservable) preferences and may sort into locations on the basis of these preferences - consumers may be uninformed -narrow range of applications (Can only value environmental g/s directly related to the price of a marketed good)

What distinguishes "weak" from "strong" sustainability?

• The economist's view has been called weak sustainability. • "Limits to growth" resembles strong sustainability. • Adds the additional requirement that natural resource stocks and environmental quality should be not be further depleted or degraded.

What does the "value of a statistical life" refer to? How is it defined?

• VSL is people's stated or revealed marginal valuation for a small change in risk, standardized (extrapolated) for a risk change of 1.0. • This is just a conventional normalization • We could just as easily standardize for risk change of one in a million: i.e. $7.40 instead of $7.4 million.