The Political Economy of Clean Energy Transitions and Climate Policy
Paper Session
Saturday, Jan. 4, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Meredith Fowlie, University of California-Berkeley
Why do Inefficient Policies Persist? Evidence from Price Freezes in Energy Markets in Brazil
Abstract
Governments around the world have relied on price freezes of salient commodities as a strategy for managing inflation expectations. In the case of Brazil, the government has maintained a wholesale gasoline price freeze since 2002 by controlling the board of Petrobras, the country’s major oil company. Often, price freezes also become de-facto energy subsidies that can compromise climate mitigation goals. Exploiting an unexpected announcement to end a wholesale gasoline price freeze in Brazil, we study the welfare effects, the distributional impacts, and the political economy determinants of the persistence of gasoline price freezes. With an event study that relies on theoretical finance models and data-driven methods (synthetic controls and machine learning) to recover counterfactual expected stock returns for Petrobras, our central estimates imply an increase of 7% of total firm value resulting from the announcement. Importantly, the price freeze is likely welfare reducing, with costs outweighing benefits. Its high gross costs are driven by the underlying cost of capital to secure the price freeze, which we calculate to be 40%. In order for the price freeze to be welfare improving, benefits from eliminating price volatility would have to be valued at least at R$0.14 per liter of gasoline. If nothing, we find no evidence that the price freeze altered individuals’ inflation expectations. Other less costly policy instruments, such as subsidies or cash transfers, could transfer the exact same amount of money to individuals, allowing them to adjust against gasoline price volatility. However, we provide suggestive evidence that the politician has no incentive to engage in a policy reform that eliminates the price freeze. This evidence is consistent with the existence of credit constraints and individuals’ over-estimation of the benefits of transfers through salience commodities. In fact, under these other alternative instruments, the politician would likely lose re-election.The Political Economic Determinants of Nuclear Power: Evidence from Chernobyl
Abstract
This paper documents several facts about the political economy of nuclear energy development, using the Chernobyl accident as a case study. Cross-country data show that Chernobyl reduced global growth in the number of nuclear power plants (NPP), and the reduction is driven by democracies. Micro data from the former U.S.S.R., China, the U.K. and the U.S. show that democracies had more news coverage about the disaster and that fossil fuel special interests leveraged the disaster to lobby against nuclear energy in democracies. The findings suggest that public fear and the fossil fuel industry lobby were important contributors to the decline in nuclear energy after Chernobyl. We estimate that the total reduction in NPP increased air pollution that has resulted in a loss of 380 million life years lost since 1986, while also raising the democracies' exposure to nuclear risk as they keep using old, early-generation reactors.The Gas Trap: Outcompeting Coal vs. Renewables
Abstract
We analyze a fundamental dilemma and time-inconsistency problem facing a climate coalition producing natural gas. In the short term, it is tempting to produce more to outcompete coal. When this policy is anticipated, however, investments in renewables fall and emissions may ultimately increase. When the coalition cannot pre-commit, its policies can be counterproductive. A calibrated version applied to Europe verifies that the gas trap is quantitatively important. We discuss the robustness of this result and possible solutions, ranging from direct investments in renewables to taxes on the search and exploration of gas.Discussant(s)
Andrew Waxman
,
University of Texas-Austin
Eric Lewis
,
Texas A&M University
Catherine Wolfram
,
Massachusetts Institute of Technology
Meredith Fowlie
,
University of California-Berkeley
JEL Classifications
- Q4 - Energy
- P0 - General