Energy Policy in Practice

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Swissotel Chicago, Zurich G
Hosted By: Association of Environmental and Resource Economists & American Economic Association
  • Chair: Joseph A. Cullen, Washington University-St. Louis

Capital Versus Output Subsidies: Implications for Alternative Incentives for Wind Energy

Joseph Aldy
,
Harvard University
Todd Gerarden
,
Harvard University
Richard Sweeney
,
Boston College

Abstract

We examine the choice between using capital and output subsidies to promote wind energy in the United States. In this sector, some subsidies support upfront investment (the section 1603 grant, which covers 30 percent of investment costs) while others reward output (the production tax credit). We exploit a natural experiment in which wind farm developers were unexpectedly given the opportunity to choose between these two options in 2009 in order to estimate the differential impact of these subsidies on project productivity. Using matching and fuzzy regression discontinuity designs, we find that wind farms choosing the capital subsidy produce 8 to 14 percent less electricity per unit of capacity than wind farms selecting the output subsidy and that this effect is driven by incentives generated by these subsidies rather than selection. We then use these estimates to evaluate the public economics of U.S. wind energy subsidies. Preliminary results suggest the Federal government paid 17 to 20 percent more per unit of output from wind farms receiving capital subsidies than they would have paid under the existing output subsidy.

Welfare Spillovers From Local Energy Policy: The Case of Renewable Portfolio Standards

Alex Hollingsworth
,
Indiana University
Ivan Rudik
,
Iowa State University

Abstract

Renewable portfolio standards (RPSs) are state-level policies that require in-state electricity providers to procure a minimum percentage of their electricity sales from renewable sources. Using both analytical and empirical models, we show that RPSs induce out-of-state emissions reductions because states allow for inter-state trade of the credits used for RPS compliance. When one state passes an RPS, it increases demand for credits faced by firms in other (potentially non-RPS) states. We find that increasing one state’s RPS stringency decreases coal<br />
generation and increases wind generation in outside states. In aggregate, this results in billions of dollars of annual welfare gains from avoided pollution.

Federal Coal Program Reform, the Clean Power Plan, and the Interaction of Upstream and Downstream Climate Policies

James Stock
,
Harvard University
Todd Gerarden
,
Harvard University
Spencer Reeder
,
Vulcan Philanthropy

Abstract

Can supply-side environmental policies that limit the extraction of fossil fuels reduce CO2 emissions? We study interactions between a specific supply-side policy – an environmental charge on federal coal, or “royalty adder” – and demand-side emissions regulation under the Clean Power Plan (CPP). Using a detailed dynamic model of the power sector, we estimate that, absent the CPP, a royalty adder equal to the social cost of carbon would generate three-quarters of the projected CPP emissions reductions. With the CPP in place, the royalty adder reduces emissions by reducing leakage and causing the CPP to be non-binding in some scenarios.

Pigouvian Taxes at Odds: Freight Vehicles and Externalities

Kevin Roth
,
University of California-Irvine
Linda Cohen
,
University of California-Irvine

Abstract

In the United States, freight truck taxes present a quandary: fuel taxes, which address environmental externalities, provide an incentive for trucks to increase their weight and with it, damage to roads and highways. Axle-weight distance charges address road damage but fail to correct for pollution externalities. Federal Courts in the United States have agreed with truckers that when states levy both taxes they impose an undue burden on truckers.

We estimate the relationship between diesel taxes, road damage, and environmental externalities using the “Weigh in Motion” (WIM) data that we have obtained for the states of California and New York. WIM data is collected on major highways from detectors embedded in the road, and offers a detailed picture of the weight and axle count of trucks on highways.

To address the endogeneity of fuel prices we regress the difference in weight between the two states on the difference in fuel prices, instrumenting for fuel prices with weather conditions in the northeastern US. Because diesel fuel and home heating oil are the same, abnormally cold or warm weather during the heating season affects the fuel price differential. Preliminary results suggest a 10% increase in fuel price increase vehicle weight by 0.5-1.0%. Quantile regression shows that these weight increases are pronounced among already heavy trucks. We find that a 50 cent diesel tax increase generates road damage equal to 10% of the increased tax revenues.

These regressions show substantial heterogeneity within states regions, likely due to variation in local industry demand. To address heterogeneity, we examine detector level results in New York and California, matching detectors on the basis of factors including the local industries, geography, and distribution of trucks’ axle-weights at that detector.
Discussant(s)
Joseph A. Cullen
,
Washington University-St. Louis
Erik P. Johnson
,
Georgia Institute of Technology
Meredith Fowlie
,
University of California-Berkeley
Jonathan Hughes
,
University of Colorado-Boulder
JEL Classifications
  • Q4 - Energy