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Implementing Environmental Policy

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Gaslamp D
Hosted By: Association of Environmental and Resource Economists
  • Chair: Lala Ma, University of Kentucky

Regulators and Environmental Groups: Better Together than Apart?

Ana Espinola-Arredondo
Washington State University
Felix Munoz-Garcia
Washington State University
Eleni Stathopoulou
Nottingham Trent University


In the last two decades, the relationship of environmental groups towards businesses has evolved, from
antagonistic to more constructive partnerships, commonly known as “green alliances.” They are regarded
as a good alternative to environmental policy since firms themselves design and implement the program.
But are they a substitute or complement of environmental regulation? In the first case, free-riding incentives
arise, implying that regulatory agencies set less stringent policies when green alliances are present. If freeriding
incentives are strong, environmental policy could be replaced by green alliances. If, in contrast, green
alliances are complementary to environmental policy, regulation becomes more effective at curbing
pollution when the EGs are present. Our paper seeks to answer this question, identifying in which contexts
green alliances and environmental regulation are substitutes or complements. We evaluate welfare gains
from EGs, and whether they are larger when environmental policy is present or absent.
We consider a sequential-move game where, first, the EG chooses a collaboration level, which reduces
abatement cost. Second, every firm responds selecting its abatement level. Third, the regulator sets an
emission fee, while firms compete in quantities. We show that environmental policy becomes less stringent
as aggregate investment in abatement increases. This gives rise to free-riding incentives in firms’ abatement
decisions, since every firm can benefit from the tax-saving effect. We find that a more generous
collaboration effort from the EG induces the regulator to set a less stringent emission fee. We nonetheless
identify synergies between the EG and regulator. First, when environmental policy is absent, the EG’s task
becomes ineffective. This suggests that green alliances cannot replace regulation since firms need tax
incentives to invest in abatement. We show that welfare from regulation becomes larger when the EG is
present. That is, regulation is effective when both EG and regulator are active.

The Price of Power: Costs of Political Corruption in Indian Electricity

Meera Mahadevan
University of California-Santa Barbara


Political capture of public electricity provision may benet targeted consumers through
informal subsidies. However, this causes leakages in utility revenues, inhibiting their ability
to reliably supply electricity to the broader consumer base. Using a close-election regression
discontinuity design, and a condential dataset on the universe of geo-coded electricity bills
from a large state in India, I show that billed electricity consumption is lower for constituen-
cies of the winning party after an election. However, actual consumption, as measured by
satellite nighttime lights, is higher for these regions. I nd new evidence to explain this
discrepancy { politicians illicitly subsidize their constituents by systematically allowing the
manipulation of electricity bills. To address this corruption through policy, it is important
to measure the size of the welfare losses, and compute demand elasticities. I develop a
method to estimate elasticities in the presence of data manipulation by leveraging exoge-
nous variation from policy-led price changes and predictive analytics. The net deadweight
loss I estimate is large enough to power 3.7 million rural households over an electoral term.

When Threats Become Credible: A Natural Experiment of Environmental Enforcement from Florida

Wesley Blundell
California State University-East Bay


Environmental regulators often use dynamic enforcement, which bases penalties and enforcement effort on plants' past compliance history, to improve compliance and decrease emissions when enforcement resources are limited. Using plant-level data from the Environmental Protection Agency (EPA), I examine an unexpected shift in the use of traditional enforcement by environmental regulators in Florida, showing that all of the state’s plants decreased emissions and improved compliance following an increase in penalties for those with Priority Violations. The largest improvements were observed among plants with the highest expected costs of compliance, which is consistent with the theory of dynamic enforcement. These results are robust to the use of control plants from nearby southern states, as well as control plants selected via a matching algorithm. The paper’s findings (1) provide quasi-experimental evidence on the effectiveness of traditional enforcement actions, and (2) suggest that dynamic incentives may matter for plant compliance decisions.

On the measurement of environmental inequality: Ranking emissions distributions generated by different policy instruments

Glenn Sheriff
Arizona State University
Erin Mansur
Dartmouth College


Adapting results from the income distribution literature, we develop a normatively significant metric with which to rank emissions distributions from alternative policy options in a manner consistent with an explicit well-behaved preference structure. This approach allows one to determine which policy has the most desirable outcome for a given demographic group as well as which groups benefit most from a given policy. Applying these methods to Southern California’s NOx pollution-trading program and a counterfactual command-and-control policy suggests that in this case trading benefited all demographic groups and generated a more equitable overall distribution of emissions, even after controlling for lower aggregate emissions. Upper-income and white demographics had more desirable distributions relative to low-income and some minority groups under the trading program, however, and population shifts over time may have undermined anticipated gains for African Americans.
Laura Grant
Claremont McKenna College
Subhrendu K. Pattanayak
Duke University
Katherine Grooms
Southwestern University
Lala Ma
University of Kentucky
JEL Classifications
  • Q5 - Environmental Economics
  • H7 - State and Local Government; Intergovernmental Relations