Mirage on the horizon: Geoengineering and carbon taxation without commitment (with Daron Acemoglu)
September 2021. NBER Working Paper, No. 24411, March 2018
Abstract: We show that, in a model without commitment to future policies, geoengineering breakthroughs can have adverse environmental and welfare effects because they change the (equilibrium) carbon taxes. In our model, energy producers emit carbon, which creates a negative environmental externality, and may decide to switch to cleaner technology. A benevolent social planner sets carbon taxes without commitment. Higher future carbon taxes both reduce emissions given technology and encourage energy producers to switch to cleaner technology. Geoengineering advances, which reduce the negative environmental effects of the existing stock of carbon, decrease future carbon taxes and thus discourage private investments in conventional clean technology. We characterize the conditions under which these advances diminish—rather than improve—environmental quality and welfare, and show that given current estimates of costs and environmental damages, these conditions are likely to be satisfied in our model.
Droughts, deluges, and (river) diversions: Valuing market-based water reallocation (job market paper)
September 2020 (first draft: October 2019). Revise and Resubmit at American Economic Review.
Abstract: This paper develops and applies a methodology to value water trading on a river network. The framework relies on regulatory variation in diversion caps to identify production functions for irrigated farms, then uses the estimated shadow values to assess the market's reallocation. I apply this framework to the largest water market in human history, located in southeastern Australia. Observed water trading increased output by 4–6% from 2007–2015, equivalent to avoiding the median water shortfall from 1°C of global warming. Reallocation and average surplus both increase substantially during drought, implying that water markets can be most valuable when climatic variability is most severe.
Work in Progress
Dynamic gains from water trading
Abstract: This paper extends the production function approach in Rafey (2020) to study how annual water market access interacts with dynamic investment decisions. The approach identifies irrigated agricultural production functions and crop adjustment costs from regulatory variation in water-sharing rules and a dynamic model of land use, then compares long-run equilibrium land allocations under market and autarky water distributions. Using panel data on perennial irrigators from a large Australian water market, a static estimator for the gains from water trade evaluated at the post-market land allocation overstates the lost output from reverting to autarky by one-tenth, by ruling out adaptation to water misallocation through crop choices. A static estimator based on the pre-market land allocation understates the value of introducing a market by about one-fifth, by failing to account for greater land investments that augment the value of annual water market access relative to fixed property rights over longer time horizons.
Conservation priorities and environmental offsets: Markets for Florida wetlands (with Dan Aronoff)
Abstract: We introduce an empirical framework for valuing dynamic decentralized markets in environmental offsets. Such markets can provide flexibility to conserve a public good at lower cost, but raise concerns if offsets cannot perfectly substitute for the original public good. In our model, producers undertake long-run conservation activities to produce offsets, which they can either sell to individuals seeking to deplete the public good, or store costlessly on a ledger. The market clears in each period to maintain the total stock of the public good above a certain historical level. We estimate this model for a decentralized market in Florida wetlands, in which land developers purchase offsets from private producers to meet their obligations under the Clean Water Act. Our approach provides a way to (i) estimate the private gains from trade, (ii) predict the imperfect substitutability, in terms of flood risk, between extant wetlands and newly-created wetlands, and (iii) assess alternative market designs that preserve the original conservation objective but incorporate location-based pricing.
Competing discourses of energy development: The implications of the Medupi coal-fired power plant in South Africa (with Benjamin K. Sovacool)
Global Environmental Change, Vol. 22 No. 3, August 2011, pp. 1141–1151