Robert N. Stavins

Technological Change and the Environment

Environmental policy discussions increasingly focus on issues related to technological change. This is partly because the environmental consequences of social activity are frequently affected by the rate and direction of technological change, and partly because environmental policy interventions can themselves create constraints and incentives that have significant effects on the path of technological progress. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics (North-Holland/Elsevier Science), summarizes for environmental economists current thinking on technological change in the broader economics literature, surveys the growing economic literature on the interaction between technology and the environment, and explores the normative implications of these analyses. We begin with a brief overview of the economics of technological change, and then examine three important areas where technology and the environment intersect: the theory and empirical evidence of induced innovation and the related literature on the effects of environmental policy on the creation of new, environmentally friendly technology; the theory and empirics of environmental issues related to technology diffusion; and analyses of the comparative technological impacts of alternative environmental policy instruments. We conclude with suggestions for further research on technological change and the environment.

Environmental Policy and Technological Change

The relationship between technological changeand environmental policy has receivedincreasing attention from scholars and policymakers alike over the past ten years. This ispartly because the environmental impacts ofsocial activity are significantly affected bytechnological change, and partly becauseenvironmental policy interventions themselvescreate new constraints and incentives thataffect the process of technologicaldevelopments. Our central purpose in thisarticle is to provide environmental economistswith a useful guide to research ontechnological change and the analytical toolsthat can be used to explore further theinteraction between technology and theenvironment. In Part 1 of the article, weprovide an overview of analytical frameworksfor investigating the economics oftechnological change, highlighting key issuesfor the researcher. In Part 2, we turn ourattention to theoretical analysis of theeffects of environmental policy ontechnological change, and in Part 3, we focuson issues related to the empirical analysis oftechnology innovation and diffusion. Finally,we conclude in Part 4 with some additionalsuggestions for research.

The energy paradox and the diffusion of conservation technology

Abstract We develop a framework for thinking about the ‘paradox’ of very gradual diffusion of apparently cost-effective energy-conservation technologies. Our analysis provides some keys to understanding why this technology-diffusion process is gradual, and focuses attention on the factors that cause this to be the case, including those associated with potential market failures — information problems, principal/agent slippage, and unobserved costs — and those explanations that do not represent market failures — private information costs, high discount rates, and heterogeneity among potential adopters. Additionally, our analysis indicates how alternative policy instruments — both economic incentives and direct regulations — can hasten the diffusion of energy-conserving technologies.

Is There a Role for Benefit-Cost Analysis in Environmental, Health, and Safety Regulation?

Benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving health, safety, and the natural environment. Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and, hence, the outcome of policy analysis. If properly done, benefit-cost analysis can be of great help to agencies participating in the development of environmental, health, and safety regulations, and it can likewise be useful in evaluating agency decision-making and in shaping statutes.

Land-use change and carbon sinks: Econometric estimation of the carbon sequestration supply function

Abstract If the United States chooses to implement a greenhouse gas reduction program, it would be necessary to decide whether to include carbon sequestration policies—such as those that promote forestation and discourage deforestation—as part of the domestic portfolio of compliance activities. We investigate the cost of forest-based carbon sequestration by analyzing econometrically micro-data on revealed landowner preferences, modeling six major private land uses in a comprehensive analysis of the contiguous United States. The econometric estimates are used to simulate landowner responses to sequestration policies. We treat key commodity prices as endogenous and predict carbon storage changes with a carbon sink model. Our estimated sequestration costs exceed those from previous engineering cost analyses and sectoral optimization models. Our estimated sequestration supply function is similar to the carbon abatement supply function from energy-based analyses, suggesting that forest-based carbon sequestration merits consideration in a cost-effective portfolio of domestic US climate change strategies.

The effects of potential land development on agricultural land prices

We conduct a national-scale study of the determinants of agricultural land values to better understand how current farmland prices are influenced by the potential for future land development. The theoretical basis for the empirical analysis is a spatial city model with stochastic returns to future land development. From the theoretical model, we derive an expression for the current price of agricultural land in terms of annual returns to agricultural production, the price of recently developed land parcels, and expressions involving model parameters that are represented in the empirical model by nonlinear functions of observed variables and parameters to be estimated. We estimate the model of agricultural land values with a cross-section on approximately three thousand counties in the contiguous U.S. The results provide strong support for the model, and provide the first evidence that option values associated with irreversible and uncertain land development are capitalized into current farmland values. The empirical model is specified in a way that allows us to identify the contributions to land values of rents from near-term agricultural use and rents from potential development in the future. For each county in the contiguous U.S., we estimate the share of the current land value attributable to future development rents. These results give a clearer indication of the magnitude of land development pressures and yield insights into policies to preserve farmland and associated environmental benefits.

Comparing Price and Non-Price Approaches to Urban Water Conservation

Urban water conservation is typically achieved through prescriptive regulations, including the rationing of water for particular uses and requirements for the installation of particular technologies. A significant shift has occurred in pollution control regulations toward market-based policies in recent decades. We offer an analysis of the relative merits of market-based and prescriptive approaches to water conservation, where prices have rarely been used to allocate scarce supplies. The analysis emphasizes the emerging theoretical and empirical evidence that using prices to manage water demand is more cost-effective than implementing non-price conservation programs, similar to results for pollution control in earlier decades. Price-based approaches also have advantages in terms of monitoring and enforcement. In terms of predictability and equity, neither policy instrument has an inherent advantage over the other. As in any policy context, political considerations are important.

Market-based environmental policies

Some eighty years ago, economists first proposed the use of corrective taxes to internalize environmental and other externalities. Fifty years later, the portfolio of potential economic-incentive instruments was expanded to include quantity-based mechanisms--tradable permits. Thus, economic-incentive approaches to environmental protection are clearly not a new policy idea, and over the past two decades, they have held varying degrees of prominence in environmental policy discussions. This paper summarizes U.S. experiences with such market-based policy instruments, including: pollution charges; deposit-refund systems; tradable permits; market barrier reductions; and government subsidy reductions. No particular form of government intervention, no individual policy instrument--whether market-based or conventional--is appropriate for all environmental problems. Which instrument is best in any given situation depends upon a variety of characteristics of the environmental problem, and the social, political, and economic context in which it is being regulated. There is no policy panacea. Indeed, the real challenge for bureaucrats, elected officials, and other participants in the environmental policy process comes in analyzing and then selecting the best instrument for each situation that arises.

Cost Heterogeneity and the Potential Savings from Market-Based Policies

Policy makers and analysts are often faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional uniform standards. We develop analytic expressions that can be employed with modest amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. These simple formulae can identify instruments that merit more detailed investigation. We illustrate the use of these results with an application to nitrogen oxides control by electric utilities in the United States.

The Problem of the Commons: Still Unsettled after 100 Years

The problem of the commons is more important to our lives and thus more central to economics than a century ago when Katharine Coman led off the first issue of the American Economic Review. As the U.S. and other economies have grown, the carrying-capacity of the planet - in regard to natural resources and environmental quality — has become a greater concern, particularly for common-property and open-access resources. The focus of this article is on some important, unsettled problems of the commons. Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open access. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality. A key contribution of economics has been the development of market-based approaches to environmental protection. These instruments are key to addressing the ultimate commons problem of the twenty-first century - global climate change.