Research Summaries

Environment, Energy, and Unintended Consequences

Matthew J. Kotchen

Economists are fascinated with based on joint production of a private unintended consequences. A policy good and a public environmental good.1 designed to accomplish a particular The purchase of electricity from renew- objective will sometimes have the oppo- able sources of energy provides an exam- site effect, or create new problems apart ple. While green electricity may cost from the one it originally sought to cor- more than electricity generated from Matthew Kotchen is a professor of rect. Well-intentioned individuals will fossil fuels, it produces the joint prod- economics at Yale University, with a pri- sometimes make choices that are coun- ucts of electricity (a private good) and mary appointment in the Yale School of terproductive to the very causes they lower emissions (a public good). Forestry & Environmental Studies and seek to support. Understanding the full Does this mean green products are secondary appointments in the School impact of policy interventions and indi- always beneficial for the environment? of Management and the Department of vidual choices is critical for the design, The answer turns out to depend on Economics. His research interests lie at the implementation, and improvement of whether there are opportunities to pro- intersection of environmental and public more effective and efficient policies. vide the public good separately. It is pos- economics and policy. Much of my research over the last sible, for example, that one’s purchase of Kotchen is a research associate in the 15 years has focused on unintended con- green electricity crowds out other activi- NBER Programs on Environmental and sequences in the field of environmental ties that reduce emissions. In such cases, Energy Economics and Public Economics. and energy economics and policy. The introducing a green good can counterin- He has held previous and visiting posi- starting point is often a simple question: tuitively increase pollution and reduce tions at Williams College, the University Does a specific policy or choice that economic welfare. of California, Santa Barbara and Berkeley, is driven by concern for environmen- In a subsequent theoretical paper, I Stanford University, and Resources for the tal protection or energy conservation consider joint production that is instead Future. He has also served as an associ- deliver on its promise, and if not, why based on the private provision of a pub- ate dean of academic affairs at Yale, as not? Research attempting to answer this lic “bad.”2 The setup more closely aligns deputy assistant secretary for environ- question has led to contributions to eco- with the way economists typically think ment and energy at the U.S. Department nomic theory on the private provision about particular goods and services gen- of the Treasury, and as a member of the of public goods and to empirical studies erating a negative externality. A novel Environmental Economics Advisory on a range of topics such as renewable feature of the model is the way that Committee of the U.S. Environmental energy, corporate social responsibility, consumers can make donations that are Protection Agency. daylight saving time, building codes, and motivated, in part, to offset the negative Kotchen leads a new NBER initia- electric cars. externality. In this context, I show how tive comprising an annual conference in donations and economic welfare differ Washington, DC, and an annual publi- Private Provision of from the standard model for privately cation, both titled En ironmental and Environmental Public Goods provided public goods. Energy Policy and the Economy. Funded by One general result is that dona- the Alfred P. Sloan Foundation, this is an Many individuals are concerned tions continue to increase, rather effort to stimulate policy-relevant research with the environmental impact of their than decrease, as an economy grows. in the field and to disseminate this research consumption choices, and these con- Moreover, an unintended consequence directly to policymakers. It is modeled after cerns have driven the emergence of mar- of this market arrangement is that the the NBER initiatives Tax Policy and the kets for environmentally friendly goods opportunity to make offsetting dona- Economy and Innovation Policy and the and services. My first theoretical con- tions will typically stimulate demand for Economy. tribution was to model “green goods,” the externality-causing good. For exam-

10 NBER Reporter • No. 3, September 2018 ple, the ability to purchase a carbon offset intervening mechanism, whereby compa- applied energy policies. Implemented as a might help an individual justify the pur- nies might pursue CSR strategies to off- conservation measure in both world wars, chase of a less fuel-efficient car. Indeed, set corporate social irresponsibility (CSI). DST has a long and fascinating history. the theory provides a framework for Jon Jungbien Moon and I disaggre- Indeed, Benjamin Franklin produced an understanding markets for environmental gated one of the widely used indices for early economic analysis of DST, showing offsets, with those that promote carbon CSR into separate measures of CSR and how much tallow and candles could be neutrality in response to climate change CSI across seven dimensions, including saved if clocks were changed to encour- being an increasingly salient example. corporate governance, community rela- age early rising during long summer days, tions, human rights, and the environ- when people could take greater advantage Offsetting Goods and Bads ment.4 Analyzing data on more than of natural daylight. The same argument is 3,000 publicly traded companies over still used today to justify DST as energy Does giving consumers a way to pay 14 years, we found that CSI is a signifi- policy in the United States, yet surpris- for their “sins of emissions” help justify an cant predictor of CSR, both overall and ingly little analysis on the subject has increase in polluting activities? Along with within specific dimensions. For exam- occurred since Franklin’s day. collaborators Grant Jacobsen and Mike ple, when a company is responsible for Taking advantage of a natural experi- Vandenbergh, I set out ment that occurred in to investigate whether Indiana, Laura Grant such behavior occurs.3 The E ect of Daylight Saving Time on Electricity Use and I estimated the We obtained electric- effect of DST on elec- 5 ity billing data for resi- Percentage change in monthly residential electricity consumption due to daylight savings time tricity consumption. dential households in 4 In 2006, the state Tennessee before and Period of daylight saving time switched to DST while after a utility company 3 simultaneously shift- introduced a volun- 2 ing some of its coun- tary green-electricity ties to a different time program. A key feature 1 zone. The combination of the program was of these two policies that households could 0 provided treatment choose to participate and control groups at different levels in -1 that allowed us to support of new wind compare differences in -2 and solar generation Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. residential electricity intended to offset the consumption before emissions associated Light-blue bars represent 95% confidence intervals and after the pol- with their own electric- Observations for April and November are excluded due to partial exposure to DST during those months icy change. We found ity consumption. Source: M. Kotchen and L. Grant, NBER Working Paper No. 14429 that — contrary to the We found that Figure 1 policy’s intent — DST households participat- increased electricity ing above the minimum threshold had an environmental accident, it compen- consumption [Figure 1]. While Franklin’s no change in electricity consumption, but sates by undertaking pro-environmen- conjecture about the demand for lighting those participating only at the minimum tal actions. When it comes to corpo- holds up, modern-day demand for heat- level — representing a “buy-in” mental- rate governance, however, the findings ing and cooling differs across hours of the ity — increased their electricity consump- are more nuanced: After an event that day, and the shift to DST increased both. tion by 2.5 percent. We thus identified reflects poorly on corporate governance, Building codes are another ubiqui- some of the first evidence on the behav- companies tend to compensate in nearly tous form of energy policy. The regula- ioral response to undertaking a pro-envi- all dimensions of CSR except for reform- tion of building practices first focused on ronmental action. ing governance itself. energy for purposes of national security I then became interested in knowing in the wake of the Arab oil embargo in whether a similar phenomenon was taking Saving Energy and Reducing the 1970s. Today, building energy codes place within corporations. The existing Pollution — Or Not across the United States and other coun- literature on corporate social responsibil- tries are motivated by concerns about ity (CSR) tends to focus on the relation- Many people are surprised to hear energy efficiency and climate change. ship between CSR and financial perfor- that daylight saving time (DST) is one Until recently, however, engineering sim- mance. I was curious about a potential of the more longstanding and universally ulations provided the only evidence on

NBER Reporter • No. 3, September 2018 11 their effectiveness. This and their environmen- led Jacobsen and me to Variation in Emissions Produced to Charge an Electric Car tal impacts depend on search for an opportu- a comparison of emis- Pounds of COƒ emissions produced by an electricity-generating power plant nity to provide an eval- needed to power a plug-in electric vehicle for 35 miles sions at tailpipes versus 35 uation that accounted 1–4 5–8 9–12 1–4 5–8 9–12 power plants. for actual construc- 30 am pm Joshua Graff- tion practices and the 25 Zivin, Erin Mansur, behavior of household and I developed a residents. 20 method for estimating We found one in 15 marginal emissions of

Florida, where the state 10 electricity generation increased the strin- at different locations gency of its building 5 and times of day across 9 energy code in 2002. 0 the United States. WECC ERCOT FRCC MRO NPCC RFC SERC SPP Average We obtained a unique Regions (see Figure 3 for reference) While previous studies dataset that included either relied on simula- detailed information “Regions” are various interconnected power grids overseen by the North American Electric Reliability Corporation tion estimates or aver- on the characteristics Source: J. Gra Zivin, M. Kotchen, and E. Mansur, NBER Working Paper No. 18462 age — rather than mar- of residential dwell- ginal — emissions, our ings and monthly bill- Figure 2 approach is based on ing data for electricity hourly load and emis- and natural gas. This enabled us to com- more about the effectiveness and effi- sions data across different interconnec- pare energy consumption of observation- ciency of building energy codes. tions of the electricity grid [Figures 2 and ally similar residences built just before We are also beginning to learn more 3]. and after the building code change. We about the potential of electric cars to The results can be used to estimate found significant decreases in both elec- lower demand for energy and reduce pol- the effect on CO2 emissions from any tricity and natural gas consumption, and lution. Generous subsidies at the state electricity-shifting policy; we focused on estimated the private payback period to and federal level, along with the extraor- increased demand to charge electric cars. be approximately six years.6 dinary market valuation of Tesla, signal We found considerable differences in the Yet subsequent research by Arik high confidence in the future benefits emissions based on geographic location Levinson, studying data from California, and scale of the electric car market. But and hours of the day. The heterogeneity is raised questions about whether the often missing from future visions is that driven by the fact that electricity is gener- energy saving effects would endure over charging electric cars also requires energy, ated in different ways, mostly from coal or the long run.7 This natural gas, at different spurred a reevaluation locations and at peak of our Florida find- Regional Powergrids versus off-peak times of ings over a longer time Interconnected power grids overseen by the North American Electric Reliability Corporation day. Notably, we found period when addi- MRO that in many Upper tional data were avail- RFC Midwestern states, an able. The results indi- NPCC electric car generates cated that after five or more CO2 emissions six years, electricity than the average econ- savings were no longer omy car. The research evident, while the nat- showed that the future ural gas savings persist- WECC environmental prom- ed.8 Questions about SERC ise of electric cars the underlying mecha- depends critically on nism and generalizabil- FRCC how electricity is gen- ity of these short-run SPP erated on the grid. and long-run effects ERCOT Subsequent research remain, but the num- Intended for illustrative purposes. Only represents the U.S. portion of North American interconnections. has also shown the ber of papers appearing Source: North American Electric Reliability Corporation importance of consid- on the subject suggests ering the health effects that we will soon learn Figure 3 of local pollution.10

12 NBER Reporter • No. 3, September 2018 Looking Ahead 16608, December 2010, and European 135–53. Economic Review, 56(5), 2012, pp. Return to Text To conclude, I must admit that the 946–60. 9 J. Graff-Zivin, M. J. Kotchen, and pattern in my research of identifying and Return to Text E. T. Mansur, “Spatial and Temporal estimating unintended consequences is 4 M. J. Kotchen and J. J. Moon, Heterogeneity of Marginal Emissions: itself an unintended consequence, the “Corporate Social Responsibility for Implications for Electric Cars and Other result of opportunistically pursuing Irresponsibility,” NBER Working Paper Electricity-Shifting Policies,” NBER research questions without preconceived No. 17254, July 2011, and The B.E. Working Paper No. 18462, October notions. While I think that uncovering Journal of Economic Analysis & Policy 2012, and Journal of Economic unexpected and sometimes counterintui- (Contributions), 12(1), 2012. Behavior & Organization, 107, 2014, tive findings is important, the growing set Return to Text pp. 248–68. of environmental and energy challenges 5 M. J. Kotchen and L. E. Grant, “Does Return to Text also requires economic research with a Daylight Saving Time Save Energy? 10 S. P. Holland, E. T. Mansur, N. Z. directly constructive agenda. Fortunately, Evidence from a Natural Experiment Muller, and A. J. Yates, “Environmental many in the field are doing precisely this. in Indiana,” NBER Working Paper No. Benefits from Driving Electric Vehicles?” A few recent and selected examples of my 14429, October 2008, and The Review NBER Working Paper No. 21291, own efforts with such a goal include using of Economics and Statistics, 93(4), June 2015, and published as “Are There revealed preferences to test among mod- 2011, pp. 1172–85. Economic Benefits From Driving Electric els for charitable giving to environmental Return to Text Vehicles? The Importance of Local causes,11 drawing insights about national 6 G. D. Jacobsen and M. J. Kotchen, Factors,” American Economic Review, and international climate policy from a “Are Building Codes Effective at Saving 106(12), 2016, pp. 3700–29. public goods framework,12 and develop- Energy? Evidence from Residential Return to Text ing new ways to think about long-term Billing Data in Florida,” NBER 11 R. Deb, R. S. Gazzale, and M. J. and intergenerational social discount Working Paper No. 16194, July 2010, Kotchen, “Testing Motives for Charitable rates.13 and The Review of Economics and Giving: A Revealed-Preference Statistics, 95(1), 2013, pp. 34–49. Methodology with Experimental Return to Text Evidence,” NBER Working Paper No. 1 M. J. Kotchen, “Green Markets and 7 A. Levinson, “How Much Energy Do 18029, May 2012, and Journal of Private Provision of Public Goods,” Building Energy Codes Really Save? Public Economics, 120, 2014, pp. 181– Journal of Political Economy, 114, Evidence from California,” NBER 92. 2006. pp. 816–34. Working Paper No. 20797, December Return to Text Return to Text 2014, and American Economic Review, 12 M. J. Kotchen, “Which Social Cost 2 M. J. Kotchen, “Voluntary Provision 106(10), 2016, pp. 2867–94. of Carbon? A Theoretical Perspective,” of Public Goods for Bads: A Theory of Return to Text NBER Working Paper No. 22246, May Environmental Offsets,” NBER Working 8 M. J. Kotchen, “Do Building Energy 2016, and Journal of the Association Paper No. 13643, November 2007, and Codes Have a Lasting Effect on Energy of Environmental and Resource The Economic Journal, 119(537), Consumption? New Evidence From Economists, 5(3), 2018, pp. 673–94. 2009, pp. 883–99. Residential Billing Data in Florida,” Return to Text Return to Text NBER Working Paper No. 21398, 13 E. P. Fenichel, M. J. Kotchen, and E. 3 G. D. Jacobsen, M. J. Kotchen, and July 2015, and published as “Longer- T. Addicott, “Even the Representative M. P. Vandenbergh, “The Behavioral Run Evidence on Whether Building Agent Must Die: Using Demographics Response to Voluntary Provision of Energy Codes Reduce Residential to Inform Long-Term Social Discount an Environmental Public Good: Energy Consumption,” Journal of the Rates,” NBER Working Paper No. Evidence from Residential Electricity Association of Environmental and 23591, July 2017. Demand,” NBER Working Paper No. Resource Economists, 4(1), 2017, pp. Return to Text

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