Abstract: In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible.The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.

Abstract: The U.S. Environmental Protection Agency’s (EPA) proposed greenhouse gas (GHG) performance standards for power plants are an important step forward in regulating GHGs in terms of both their substantive impact and legal precedent. Nevertheless, we have some concerns with the proposal, which we discuss in the following comments submitted to the agency. The majority of our comments are directed to ways that EPA can increase certainty for the industry—reducing costs and, possibly, improving environmental outcomes. We highlight two specific areas of concern. First, the current proposal contributes to the significant uncertainty facing existing sources. Second, EPA’s proposed averaging option for new facilities that will install carbon capture-and-storage (CCS) technology in the future, although intended to create a flexible pathway, unfortunately creates some new regulatory uncertainty. We also comment on EPA’s decision to combine most coal and gas generators into a single source category. We believe this decision is legally valid and practically important, and that EPA should resist pressure to reconsider.

Abstract: Regulators often seek to promote the use of improved, cleaner technology when new investments occur; however, technology mandates are suspected of raising costs and delaying investment. We examine investment choices for electricity generation under a strict emissions rate performance standard requiring the installation of carbon capture and storage (CCS) on fossil-fired plants. We compare the strict standard with a flexible one that imposes a surcharge for emissions in excess of the standard. A third policy allows the surcharge revenue to fund later CCS retrofits. Analytical results indicate that increasing flexibility leads to earlier introduction of CCS, lower aggregate emissions and higher profits. We test this using multi-stage stochastic optimization, with uncertain future natural gas and emissions allowance prices. Under perfect foresight, the analytical predictions hold. With uncertainty, these predictions hold most often but we find outcomes that contradict the theory. In some cases, investments are delayed to enable the decisionmaker to learn additional information.

Abstract: The environmental remediation required to permanently decommissionmost industrial projects is an expensive and irreversible investment. Real options literature shows that temporarily closing a project and postponing decommissioning has value when economic conditions are uncertain and future reactivation is possible. However, high decommissioning costs create an incentive to “temporarily” close a project, even when there is no intention to reactivate. This paper estimates a dynamic discrete choice model of closure to evaluate the likelihood of reactivation. The model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in Canada.

Abstract: This paper studies the patterns of farmers’ crop choices for a multiple-crop portfolio, where production risk considerations and rainfall uncertainty are likely to be critical factors. Our analysisemploys plot-level panel data from Ethiopia, combined with seasonal and yearly rainfall variability (from 30 years of meteorological data corresponding to the survey villages). Using the single indexapproach, our results indicate that the combined riskiness of crop portfolios at a household level responds negatively to annual rainfall variability, while seasonal rainfall variability has less consistent impact. Farmers are more likely to select less risky crops with less return, even when intercrop interactions are taken into account. Moreover, development policies designed to enhance accumulation and risk taking should take into account the importance of such exogenous factors as weather in ex-ante risk taking.

Abstract: This study looked into tree-growing behavior of rural households in Ethiopia. With data collected at household and parcel levels from the four major regions of Ethiopia, we analyzed the decision to grow trees and the number of trees grown, using such econometric strategies as a zero-inflated negative binomial model, Heckman’s two-step procedure, and panel data techniques. Our findings show the importance of analysis at the parcel level in addition to the more common household-level. Moreover, the empirical analysis indicates that the determinants of the decision to grow trees are not necessarily the same as those involved in deciding the number of trees grown. Land certification, as an indicator of tenure security, increases the likelihood that households will grow trees, but is not a significant determinant of the number of trees grown. Other variables, such as risk aversion, land size, adult male labor, and education of household head, also influence the number of trees grown. In general, the results suggest the need to use education and/or awareness of the role and importance of trees and point out the importance of household endowments and behavior, such as land, labor, and risk aversion, for tree growing. Finally, we observed that, while tree planting is practiced in all four regions covered,there are variations across regions.

Abstract: Current and proposed greenhouse gas cap-and-trade systems allow regulated entities to offset abatement requirements by paying unregulated entities to abate. These offsets from unregulated entitiesare believed to contain system costs and stabilize allowance prices. However, the supply of offsets is highly uncertain. Furthermore, the offset supply uncertainty may be correlated with other sources ofuncertainty in emissions trading systems. This paper presents a model that incorporates both uncertainties in the supply of offsets and in abatement costs. Using numerical methods we solve the model under avariety of parameter settings, including a system that includes allowance price controls. We find that as uncertainty in offsets and uncertainty in abatement costs become more negatively correlated, expected abatement plus offset purchase costs increase, as does the variability in allowance prices and emissions from the regulated sector. Imposing an allowance price collar that limits the upper and lower cost substantially mitigates cost increases as well as the variability in prices and emissions, while roughly maintaining expected environmental outcomes.

Abstract: Federal regulatory policy and the evaluation of regulations using benefit-cost analysis continue to be quite contentious. Advocates for more regulation claim that benefit-cost analysis loses information andimpedes our understanding of the real beneficial consequences of regulatory action. Against this backdrop, economists and advocates of economic analysis have sought to improve the quality and technical content of benefit-cost analysis. This paper examines key changes made by the 2003 guidelines in Circular A-4 for regulatory analysis issued by the U.S. Office of Management and Budget in an effort to strengthen such analysis. This paper discusses the motivation and basis for these changes—the treatment of discount rates and uncertainty and the cost-effectiveness analysis for rules affecting health and safety—and evaluates the EPA’s response to the A-4 changes in its analysis of environmental rules.

Abstract: Between 1990 and 2000 the U.S. Nuclear Regulatory Commission and the Commission of the European Communities conducted a joint uncertainty analysis of accident consequences for nuclear power plants. This study remains a benchmark for uncertainty analysis of large models involving high risks with high public visibility, and where substantial uncertainty exists. The study set standards with regard to structured expert judgment, performance assessment, dependence elicitation and modeling and uncertainty propagation of high dimensional distributions with complex dependence. The integratedassessment models for the economic effects of climate change also involve high risks and large uncertainties, and interest in conducting a proper uncertainty analysis is growing. This article reviews the EU-USNRC effort and extracts lessons learned, with a view toward informing a comparable effort for the economic effects of climate change.

Abstract: Uncertainty is a fundamental characteristic of climate change. This paper focuses on uncertainty that is introduced in the implementation of policy, especially as it affects the level and distribution of theburden on households that results from the allocation of emissions allowances. We examine the Waxman–Markey bill (H.R. 2454), with bookend scenarios labeled optimistic and pessimistic. The scenarios vary outcomes associated with allocations to local distribution companies, investments in electricity energy efficiency and technology development. We introduce a third scenario that allocates asubstantial portion of allowance value directly to households. We find the average consumer surplus loss per household in 2016 in the optimistic scenario to be $136 and the allowance price is as low as $13.20 per ton. In the pessimistic scenario, the consumer surplus loss rises to $413, with an allowance price of $23.43 per ton. Allocation of allowance value directly back to households provides an intermediate, but more certain, result.

Abstract: An understanding of the uncertainty in benefit and cost estimates is a critical part of a benefit–cost analysis. Without a quantitative treatment of uncertainty, it is difficult to know how much confidenceto place in these estimates. In 2002, an NRC report recommended that EPA move toward conducting probabilistic, multiple-source uncertainty analyses in its RIAs with the specification of probabilitydistributions for major sources of uncertainty in the benefit estimates. In 2006, reports by GAO and RFF found that EPA had begun to address the NRC recommendations, but that much remained to be done to meet the NRC concerns. This paper provides a further review of EPA’s progress in developing a quantitative assessment of the uncertainties in its health benefits analyses for the RIAs for four recent NAAQS rulemakings. In conclusion, EPA’s recent RIAs present the results of its uncertainty analyses in piecemeal fashion rather than providing an overall, comprehensive statement of the uncertainty in its estimates. In addition, its recent RIAs continue to focus on the concentration-response relationship and largely fail to address the uncertainty associated with the other key elements of the benefits analysis.

Abstract: We looked at risk and ambiguity attitudes among Ethiopian peasants in one of the poorest regions of the world and compared their attitudes to a standard Western university student sample elicited by the samedecision task. Strong risk aversion and ambiguity aversion were found with the Ethiopian peasants, and these attitudes are similar to those of the university students. Testing for the effect of socioeconomicvariables on uncertainty attitudes showed that poor health increased both risk and ambiguity aversion.

Abstract: There is a low but uncertain probability that climate change could trigger “mega-catastrophes,” severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes—drastic abatement of greenhouse gas emissions, development and implementation of geoengineering, and large-scale ex ante adaptation—against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.

Abstract: The risk of losing income and productive means due to adverse weather can differ significantly among farmers sharing a productive landscape and is, of course, hard to estimate or even “guesstimate” empirically. Moreover, the costs associated with investments in adaptation to climate are likely to exhibit economies of scope. We explore the implications of these characteristics on Costa Rican coffee farmers’ decisions to adapt to climate change, using a framed field experiment. Despite having a baseline of high levels of risk aversion, we still found that farmers more frequently chose the safe options when the setting is characterized by unknown risk (that is, poor or unreliable risk information). Second, we found that farmers, to a large extent, coordinated their decisions to secure a lower adaptation cost and that communication among farmers strongly facilitated coordination.