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Environment in a Multisector Economy

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Gaslamp D
Hosted By: Association of Environmental and Resource Economists
  • Chair: Jill Caviglia-Harris, Salisbury University

Effects of Tightening Renewable Energy Standards: Analytical General Equilibrium Model and Empirical Tests

Don Fullerton
University of Illinois
Chi Lan Ta
University of Illinois


Our analytical general equilibrium model is used to explain why tightening a state’s Renewable Portfolio Standard (RPS) unambiguously reduces carbon dioxide emissions but has ambiguous effects on renewable energy development. Second, it shows how the direction and magnitude of the effects of tightening the RPS on both carbon emissions and renewable deployment depend on key factors such as the state’s endowment of intermittent resources like wind and solar potential as well as non-intermittent resources like geothermal or hydropower potential. Results also depend on actual renewable energy intermittency, transmission constraints, the pre-existing renewable energy requirement, each cost share parameter, and each elasticity of substitution. We use the model to generate testable hypotheses, and we use U.S. state-level data from 1990 to 2015 to test these hypotheses.

Efficiency Wages, Unemployment, and Environmental Policy

Garth Heutel
Georgia State University
Xin Zhang
Georgia State University


The incidence of environmental policy and its impact on unemployment have played a
central role in the political debate over whether and to what extent environmental regulations
"kill jobs." We study the incidence of environmental taxes and their impact on unemployment in
an analytical general equilibrium model with efficiency wages and involuntary unemployment.
Our paper contributes to the literature by developing a framework for introducing
unemployment into analytical general equilibrium models of environmental policies. The
previous literature contains studies of environmental tax incidence only in computational general
equilibrium models (Hafstead and Williams 2018) or in analytical general equilibrium models
under the assumption of full employment (Fullerton and Heutel 2007).
Our model is a simple two-sector, two-factor incidence model, in the spirit of Harberger
(1962), with the addition of involuntary unemployment through an efficiency wage as in Agell
and Lundborg (1992) and Rapanos (2006), and with the addition of pollution as in Fullerton and
Heutel (2007, 2010). The pollution is modeled as an input along with capital and labor in one of
the sectors, which allows fully general forms of substitution among these three factors. Minimal
restrictions are placed on our production function so that the model allows for analyses of a wide
variety of policies.
We solve the model to find closed-form analytic solutions for the general equilibrium
responses to a change of pollution tax rate, including expressions for changes in factor prices,
output prices, the amount of pollution, and overall unemployment as well as the employment
shift between polluting and non-polluting sectors. The model allows us to clarify the impact of
differential factor intensities, substitution effects, and output effects by looking at various special
cases. Lastly, we conduct numerical simulations using calibrated parameter values.

Environmental Policies That Shape Productivity: Evidence from Cattle Ranching in the Amazon

Fanny Moffette
University of Wisconsin
Marin Skidmore
University of Wisconsin
Holly Gibbs
University of Wisconsin


We examine potential economic benefits of environmental policies, increased agricultural investment and productivity. Two anti-deforestation policies in the Brazilian Amazon are analyzed: the Priority List, which increases the intensity of fines for deforestation, and the G4 Cattle Agreements, which is a market exclusion mechanism. We compare cattle ranchers’ optimal behavior under each policy and extract predictions about their impacts in order to determine which agricultural actors are affected and what the expected combined policy effects might be. A spatial database that covers land-use in Brazil from 2004 - 16 combined with a unique dataset of slaughterhouse locations provide sample comparability since we restrict our analysis to municipalities that ever had an exporting slaughterhouse nearby. We use variations in time and exposure levels of the two policies and find that both increased productivity, while the G4 also increased investment. This research reveals both indirect and unexpected benefits of environmental regulation.

Local Bank Lending Following a Natural Disaster

Justin Gallagher
Montana State University
Daniel Hartley
Federal Reserve Bank of Chicago


Local lending institutions are more important for victim-level and regional-scale economic redevelopment
after a natural disaster than has been previously recognized. Gallagher and Hartley (2017) show that
lending by banks after Hurricane Katrina differed based on whether the bank had a large (“local” bank) or
small share (“national” bank) of its loans going to New Orleans in the years before Katrina. Overall, US
banking deregulation has largely been viewed as favorable due to its role in reducing state-level business
cycles (e.g. Morgan et al., 2004), improving bank financing to small firms (e.g. Cetorelli et al., 2006), and
diversifying bank assets (e.g. Levine et al., 2016). Our study expands on Gallagher and Hartley (2017)
and examines whether an increased regional lending share by nationally diversified banks at the time of a
disaster leads to a less desirable social outcome: a reduction in total lending to economically distressed
areas after a natural disaster.
First, we develop a theoretical model to better understand how bank lending incentives differ between
local and national banks following a natural disaster. Second we create a new, national database from
1980-present with county-level information on all major US floods, the level of local and national bank
lending each year, and yearly economic regional outcomes. Third, we show that regions with a higher
local bank lending share at the time of a disaster have higher post-disaster lending. We use a banking
deregulation instrument to account for the possible endogeneity in the amount of lending by local banks at
the time of a disaster (e.g. Morgan et al., 2004). The final step is to use the deregulation instrument to
estimate how differing shares of local bank lending at the time of a natural disaster affect post-disaster
household finance and regional economic recovery.
Karen Palmer
Resources for the Future
Stephie Fried
Arizona State University
Jill Caviglia-Harris
Salisbury University
Ai He
University of South Carolina
JEL Classifications
  • Q5 - Environmental Economics
  • D5 - General Equilibrium and Disequilibrium