First Quarter Journal Highlights: Regulations Behaving Badly

First Quarter Journal Highlights: Regulations Behaving Badly


A recent article in the Journal of Environmental Economics and Management (JEEM) coined a new (albeit clunky) phrase: the macroeconomic environmental rebound/backfire effect.  This effect occurs when a “green improvement,” such as an energy efficiency program, results in less of an environmental improvement than expected. This is not due to unrealistic expectations, but due to what the authors term the substitution, wealth, and sectoral reallocation effects. The substitution effect occurs when the green promotion lowers the price of the green good relative to the dirty one, and so households adjust their consumption towards the green good and away from the dirty one.  So far, so good.  But the wealth effect can work in the opposite direction. As households experience an increase in their buying power due to the now (relatively cheaper) green good, they will purchase more of everything in what economists term their “consumption bundle” – including dirty goods. Finally, the sectoral reallocation effect occurs when firms reallocate their resources between the dirty and green sectors.  Depending upon the magnitude and intensity of these three effects, a green improvement could actually lead to an increase in pollution. (Environmental rebounds/backfires: Macroeconomic implications for the promotion of environmentally-friendly products. Juin-JenChang, Wei-NengWang, Jhy-YuanShieh, Volume 88, March 2018, Pages 35-68)

Also in JEEM this quarter is a very interesting article looking at the potential for “spillovers” when regulating multiple pollutants, such as greenhouse gases and particulate matter.  A regulatory spillover is when a regulation aimed at one pollutant has an effect (either positive or negative) on the emissions of another pollutant.  For example, carbon dioxide and particulate matter are both formed through the combustion of fossil fuels, so a policy aimed at reducing the emission of greenhouses gases may reduce particulate matter at the same time. That’s an example of a positive spillover.  However, as the article points out, it’s also possible that a regulation may have a negative spillover; for example, switching from fossil fuels to biomass may reduce emissions of carbon dioxide, but increase emissions of nitrogen oxides or particulate matter.  Failure to account for policy spillovers, either positive or negative, can lead to poorly targeted regulations. 

The authors consider a transboundary pollutant (such as carbon dioxide) and a local pollutant (such as particulate matter).  For policy options, they consider emissions taxes and emissions quotas.   They find that policies to reduce greenhouse gases can lead to positive spillovers for local pollutants if the technologies that are used to reduce both are complementary. This is not a surprising result. However, they then look at whether there is an international agreement in place to reduce greenhouse gas emissions. Their results suggest that if there is such an agreement in place, emissions of the local pollutant may actually increase if countries behave strategically (I.e., increase their emissions in the hopes of getting larger quotas), or when the revenue from a tax is kept within its borders. Policy spillovers in the regulation of multiple pollutants Pages 114-134 JEEM Stefan Ambec, Jessica Coria Volume 88, March 2018        

Of real interest to us in New England is a recent article that appears to suggest that the Regional Greenhouse Gas Initiative (RGGI), geared at reducing carbon emissions in some northern states, actually is associated with an increase in carbon emissions elsewhere (a phenomenon called “leakage” that occurs when regulations designed to reduce emissions in one geographic area actually increase emissions somewhere else).  While emissions decreased overall, authors found, the decrease was partially offset by an increase in neighboring states.  They conclude that such leakage means that we cannot attribute quite as much of a decrease in emissions to RGGI as originally thought.  Leakage in regional environmental policy: The case of the regional greenhouse gas initiative Harrison Fell and Peter Maniloff JEEM Volume 87, January 2018, Pages 1-23 

And finally, a slightly different type of article: several researchers from the University of Pisa in Italy investigated the links between per capita income and new cancer incidence by looking at a cross-sectional dataset from 122 countries.  They found that the incidence rate of all-sites cancer increases linearly with per capita income, even after controlling for population ageing, improvement in cancer detection, and omitted spatially correlated variables.  The article lends further support to the so-called “cancer transition hypothesis,” a theory that links economic development with a shift in the onset of cancers from those linked with infectious diseases to those linked with other types of risk factors.  To quote from the article itself: “our analysis shows that the cancer epidemic cannot be explained solely by higher life expectancy, by better statistics and by regional peculiarities: rather, a significant role must also be attributed to environmental degradation and life-styles. Unfortunately, our regressions are unable to distinguish between the two” (p 388).  Unfortunate, indeed.  Ecological Economics 146 (2018) 381–396 Economic Growth and Cancer Incidence T. Luzzati , A. Parenti, T. Rughi 

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