Economics of Environment and Energy

Rapid deterioration of the natural environment may, in part, be due to political incentives driving a wedge between the design and implementation of environmental policies (Burgess et al., 2011; Duflo et al., 2013; Greenstone and Jack, 2015; Lipscomb and Mobarak, 2016). We test whether politics affects environmental degradation by exploiting the variation in political incentives induced by electoral cycles. Politicians have been shown to increase spending and postpone tax increases in the years leading up to an election (e.g., Nordhaus, 1975; Rogoff, 1990; Besley and Case, 1995) and these same electoral concerns may affect the degree to which the environment is protected.

Pigou (1920) pointed to “uncompensated damage done to surrounding woods by sparks from railway engines” as the canonical example of an environmental externality. We study a modern corollary – tropical forest fires – which are used as a cheap, though illegal, means of land clearance by firms but pose the risk that, once set, they burn out of control creating significant local, national and global externalities. To do so, we merge 15 years of daily satellite data on fire hotspots over time and space to construct, for over 100,000 unique fires, the point of ignition and the extent of fire spread. We document that fire patterns are consistent with intentional actions, as fires systematically follow deforestation and occur predominately in oil palm and paper pulp concessions which regularly clear large swaths of land. To examine whether firms exercise greater control over their use of fire when the costs of it spreading are higher, we use the fact that fires are predictably more likely to spread on windy days, but the degree to which this is an externality depends on who owns surrounding land. We find that firms overuse fire relative to what they would if all spread risks were internalized, but this difference depends on which types of lands would be burned. Specifically, firms appear to take into account the risks of government punishment, which is focused on burning near protected forest or highly populated areas, but appear to worry much less about burning unleased national forest areas, which attract less government attention. Our estimates suggest that if firms treated the fire spread risks to surrounding lands the same as they do for their own lands, fires would be reduced by 14 percent. However, if firms were as concerned about spread risks to surrounding lands as they are to protected forest or populated areas, fires would be reduced by 67 or 80 percent, respectively.

Falling off-grid solar prices and subsidized grid extension are revolutionizing choice for the billion people without electricity. We use experimental price variation to estimate demand over all electricity sources in Bihar, India, during a four-year period when electrification rates leapt from 27% to 64%. We find that household surplus from electrification tripled, with gains due nearly as much to off-grid solar as to the subsidized grid. Choice matters—the surplus from electrification is 3-5× greater than from any one source. Nonetheless, we project future electrification will come mainly from the grid, since households prefer the grid as they grow wealthier.

This paper seeks to explain why billions of people in developing countries either have no access to electricity or lack a reliable supply. We present evidence that these shortfalls are a consequence of electricity being treated as a right and that this sets off a vicious four-step circle. In step 1, because a social norm has developed that all deserve power independent of payment, subsidies, theft, and nonpayment are widely tolerated. In step 2, electricity distribution companies lose money with each unit of electricity sold and in total lose large sums of money. In step 3, government-owned distribution companies ration supply to limit losses by restricting access and hours of supply. In step 4, power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers' incentives to pay. The equilibrium outcome is uneven and sporadic access that undermines growth.

Nearly a billion people, mostly in rural Africa and South Asia, do not have electricity at home. The advent of off-grid solar power means that many of these households, at the frontier of global electrification, have a choice between competing sources of electricity. This paper studies the demand for electricity with a discrete choice model wherein households choose between grid electricity, several off-grid electricity sources, and having no electricity at all. The model is estimated using a randomized experiment that varied the price of solar microgrids for a sample of villages in the state of Bihar, India, an outpost on the global electrification frontier. There are three main findings. First, households value electricity, but demand for any one electricity source is highly elastic, because several sources provide similar energy services at similar prices. Second, even in a relatively poor, rural sample, richer households greatly prefer grid electricity. Third, future growth in income will drive an increase in electrification due mainly to new grid connections, even if the cost of solar continues to fall. Our analysis suggests that off-grid solar power provides an important stop-gap technology, which fills the space between having no electricity at all and grid electricity, but that the future will run on the grid.

Coasts contain a disproportionate share of the world’s population, reflecting historical advantages, but environmental change threatens a reversal of coastal fortune in the coming decades as natural disasters intensify and sea levels rise. This paper considers whether large infrastructure investments should continue to favour coastal areas. I use a dynamic spatial equilibrium framework and detailed georeferenced data from Vietnam to examine this issue and find evidence that coastal favouritism has significant costs. Road investments concentrated in coastal regions between 2000 and 2010 had positive returns but would have been outperformed by allocations concentrated further inland even in the absence of sea level rise. Future inundation renders the status quo significantly less efficient. Under a central sea level rise scenario, welfare gains 72% higher could have been achieved by a foresighted allocation avoiding the most vulnerable regions. The results highlight the importance of accounting for the dynamic effects of environmental change in deciding where to allocate infrastructure today.

Whether openness to trade can be expected to reduce or exacerbate the equilibrium exposure of real income to productivity shocks remains theoretically ambiguous and empirically unclear. In this paper we exploit the expansion of railroads across India between 1861 to 1930—a setting in which agricultural technologies were rain-fed and risky, and regional famines were commonplace—to examine whether real incomes became more or less sensitive to rainfall shocks as India’s district economies were opened up to domestic and international trade. Consistent with the predictions of a Ricardian trade model with multiple regions we find that the expansion of railroads made local prices less responsive, local nominal incomes more responsive, and local real incomes less responsive to local productivity shocks. This suggests that the lowering of transportation costs via investments in transportation infrastructure played a key role in raising welfare by lessening the degree to which productivity shocks translated into real income volatility. We also find that mortality rates became significantly less responsive to rainfall shocks as districts were penetrated by railroads. This finding bolsters the view that growing trade openness helped protect Indian citizens from the negative impacts of productivity shocks and in reducing the incidence of famines.

This paper reveals a stark inequality in the effect of ambient temperatures on death in human populations. Using district-level daily weather and annual mortality data from 1957 to 2000, we find that hot days lead to substantial increases in mortality in rural but not urban India. Despite being far poorer, the mortality response in urban India is not dissimilar to that in the US over the same period. Looking into potential mechanisms we find that the rural death effects are driven by hot days in the growing season which reduce productivity and wages in agriculture. Consistent with a model of endogenous survival in the face of credit constraints, we also find that the expansion of bank branches into rural India helped to mitigate these effects. When coupled with a climatological model that predicts many more hot days in a typical year by the end of this century, these estimates imply considerable reductions in rural Indian, but not urban Indian or US, life expectancy ceteris paribus.