Research We Can Use As We Consider the Changes To Come in a Lower-Carbon Economy

By Hank Boerner – Chair & Chief Strategist – G&A Institute

There certainly is a large body of research findings and resulting projections of what to expect as society moves toward a lower-carbon global economy.  The research comes from the public sector, academia, NGOs, capital market organizations, and scientific bodies.  One of the most comprehensive of analysis and projections is the National Climate Assessment produced periodically by the U.S. federal government. 

One reliable source of research that we regularly have followed for many years is the The National Bureau of Research (NBER), a not-for-profit “quant” research organization founded 100 years ago in Boston, Massachusetts.  The organization boasts of a long roster of economic experts who issue many Working Papers during the year (1,000 or more) with permission granted to reproduce results.

Such is the stature of NBER over many years that this is the organization that issues the official “start and end” of recessionary periods in the U.S. (you probably have seen that mentioned in news stories).

Lately NBER researchers have been focused on ESG-related topics.  We are sharing just a few top line research results here for you.

Research Results: California’s Carbon Market Cuts Inequality in Air Pollution Exposure

In NBER Working Paper 27205, we learn that California’s GhG cap-and-trade program has narrowed the disparity in local air pollution exposure between the disadvantaged populations and others.  The state’s is second largest carbon market in the world after the European Union’s cap-and-trade (based on total value of permits).

Early on there were concerns that market forces could worsen existing patterns in which disadvantaged neighborhoods would be exposed to even more pollution that better-off counterparts.  Not so, say researchers Danae Hernandez-Cortes and Kyle C. Meng, who examined 300 facilities in the 2008-2017 period.

Findings:  The gap in pollution exposure between disadvantaged and other communities in California narrowed by 21% for nitrogen dioxide; 24% for sulfur dioxide; and 30% for particulates following the introduction of cap and trade. (This between 2012, the start of the state’s program, and 2017).  The researchers labeled this the “environmental justice gap”.

California’s law caps total annual emissions of GhGs, regulating major stationary GhG-emittting sources, such as utilities.  Putting a price on carbon encourages firms to buy emissions permits or carbon offsets.  The researchers say that shifting emission cuts from high-to-low abatement cost polluters, cap-and-trade can be more cost-effective than imposing uniform  regulations on diverse industries.  But – “where” pollution is generated could be altered by market forces and either exacerbate or lessen existing inequities in pollution exposure.

Research Findings:  Building in Wildland-Urban Interface Areas Boosts Wildlife Fire Costs

Speaking of California, over the past few years (and even today as we write this commentary) wildfires have affected large areas of the state.  Who pays the cost of firefighting as more people build homes in high fire-risk areas near federal and state-owned public land?

Researchers Patrick Baylis and Judson Boomhower in NBER Working Paper 26550 show that a large share of the cost of fire fighting is devoted to trying to prevent damage to private homes and borne by the public sector…where there is “interface” between wild areas and urban areas. The guarantee of federal protection generates moral hazard because homeowners do not internalize the expected costs of future protection when they decide where to live or how to design and maintain their homes.

The net present value of fire protection subsidies can exceed 20% of a home’s value.  For 11,000 homeowners in the highest risk areas of the American West, the researchers calculated a subsidy rate of 35% of a home’s value…compared to only 0.8% in the lowest risk area.  And, about 84,000 more homes have been built in high risk areas (than would have been the case) had federal wildlife protection not lowered the cost of homeownership in those areas.

Fire protection provided by the public sector effectively subsidizes large lot sizes and low-density development and may reduce the private incentive to choose fireproof building materials and clear brush around the home.  Fire protection costs level off about 6 acres per home (suggesting cluster development is more preferable).

As we consider the impacts of climate change (drought, high winds, other factors becoming more prevalent), the role of local and state governments in zoning, land use and building code decision-making is key to addressing fire prevention.  Nice to live near to preserved state and federal land…but not sometimes.

Research to Consider:  Environmental Preferences, Competition, and Firm’s R&D Choices

In NBER Working Paper 26921, we learn that consumers’ environmental preferences do affect companies’ decisions to invest in environmentally-friendly innovations.  Buyers care about the environmental footprint of the products they buy.  And so companies do consider these preferences when they make R&D decisions.  (That is, choosing “dirty” or “clean” innovations to invest in.)

Companies use data on patents, consumers’ environmental preferences, and product-competition levels in the automobile manufacturing  industry.  Researchers Philippe Aghion, Roland Benabou, Ralf Martin and Alexandra Roulet looked at 8,500 firms in 42 countries, studying the period 1998-2012 to try to determine how companies in the industry respond to detected changes in consumer preferences.

Findings include:  Firms in auto-related businesses whose customers are environmentally-focused are more inclined to develop sustainable technologies, particularly in markets defined by higher levels of competition.

One effect reported is that for firms with more sustainability-minded consumers, the growth rate of “clean” patents is 14% higher than for “dirty” patents…and is 17% higher in more competitive markets.

Individual consumer preference for “buying green” may not have a direct impact on pollution short-term — but over time such preferences can alters an auto company’s willingness to invest in R&D focused on environmentally-friendly products.

Research Investors Think About:  Could Undeveloped Oil Reserves Become “Stranded” Assets?

If the vehicle shopper wants to “buy green” and is seeking “environmentally-friendly” products, what is the long-term effect on vehicle manufacturing if that segment of the market grows — especially in highly-competitive markets?  Do these preferences mean buyers will move away from fossil fuel-powered vehicles…and over time the in-the-ground assets of energy companies will become “stranded”?

Researchers Christina Atanasova and Eduardo S. Schwartz examined the relationship between an oil firm’s growth in “proved” assets and its value.  The question they posed for their research NBER Working Paper 26497 was: “In an era of growing demands for action to curb climate change, do capital markets reflect the possibility that some reserves may become “stranded assets” in the transition to a low-carbon economy?”

They looked at 679 North American producers for the period 1999-2018; the firms operating (as they described) in an environment of very low political risk and foreign exchange exposure…and with markets that are liquid, with stringent regulation and monitoring (unlike companies in countries with markets that are more easily manipulated, among other factors).

Findings: Capital markets only valued those reserves that were already developed, while growth of undeveloped reserves had a negative effect on an oil firm’s value.  The negative effect was stronger for producers with higher extraction costs and those with undeveloped reserves in countries with strict climate policies.  This reflects, they said, consistency with markets penalizing future investment in undeveloped reserves growth due to climate policy risk.

These are a small sampling of NBER research result highlights.  The full reports can be purchased at NBER individually or by annual subscription.  Contact for information about Working Papers and other research by the organization is:  NBER, 1050 Massachusetts Avenue, Cambridge, MA 02138-5398.

 

 

Global Trade – Good or Bad For Nations – For Individuals — a Factor in Encouraging Greater Sustainability for Society?

by Hank Boerner – Chair, G&A Institute

“Trade” can be viewed in the macro-environment or the micro, with personal advantages and disadvantages for men and women in both developed and developing nations.

With a new administration coming to Washington DC in January 2017, the heated rhetoric of the 2016 presidential primaries and during the general campaign quickly moved “trade” as a loose-lip and often-un-informed talking point at rallies in the direction of possibly enacted national public policy.

Tear up NAFTA  – punish China – make cozy deals with countries one-at-a-time instead of multi-lateral agreements.  That’s seemingly the direction of the Trump Administration policy-making in 2018 — if we believe the rhetoric.

So — the question hangs — is global trade good or bad for U.S. workers…for the economy…for workers in both developed and developing nations…as a positive or negative in the quest for greater global sustainability?

As in all policy making, we must search for truth and evidence to help answer the questions — and guide public governance.

We do have help if we want to tune in to the source:  The independent, not-for-profit National Bureau of Economic Research (NBER) weighed in in April with a Working Paper: “How Large Are the U.S. Economy’s Gains From Trade?”

FYI – NBER (founded in 1920) is based in Cambridge, Massachusetts, and has a huge cadre of economists and researchers that work to provide us with “objective, quantitative analysis of the American economy.”

The scholars issue a steady stream of Working Papers for public consumption (and study and discussion by policy makers looking for “truth, fact, objectivity, reliable findings”  — my characterizations).

The name may ring a bell — NBER is the non-governmental organization that declares the official start and end of a U.S. recession, for example.  Their declaration is often separate of what is going on in the capital markets so it stands out.

In the current paper, the researchers examined “estimates of the economic benefits of a globally-open economy.”  And the impact plus or minus on the American economy.

Most likely results: they see a gain for the U.S. domestic economy of from 2% to 8% through open global trade, depending on certain assumptions about consumer and producer behavior.

What if we actually slammed the door shut on trade beyond our borders?  Authors Arnaud Costinot and Andres Rodrigues-Clare explain there is [surprisingly] little direct quantitative evidence on how the economy would react if we did begin to close the doors on global trade. (Note to policymakers: That’s why we don’t make hasty or dumb decisions on trade!)

Looking at such factors as labor and capital embedded in goods purchased from around the world, they estimated the gains from trade by comparing the size of a “counter-factual” U.S. economy that would depend entirely on domestic sources compared with a nation (like the USA) that has ready access to foreign services and goods.

While the dollar value of U.S. imports is large, as a percentage of national spending it is actually really small.

There are varying impacts of open trade on individual industries – and the enterprises and their workers.

For garment and apparel companies the demand for cheap labor is “in-elastic” in economic lingo. Not much wiggle room or flexibility. That is why the companies go to East Asia for labor inputs.

For an American automaker, the import of German-made transmissions for installation in Detroit’s models is somewhat lesser of an impact (there are always alternatives).  US manufacturers used to be more “integrated” and made most of the components for their trucks and cars. Now the industry is defined as a global sourcer.

For U.S. farmers, the impact depends on where else in the world wheat is grown and the ready availability and pricing for that wheat. Trade is critical to the American farm belt.

Think of rare minerals used in manufacturing — if vital minerals are only available in certain areas of the globe, and are needed (say for making cell phones or other electronic products), the dependency is greater for U.S. manufacturers (again, in-elasticity reigns).

Tradeoffs in global trade exist everywhere: Lower consumer prices are enjoyed (as designer-label garments flow to U.S. retailers’ shelves from cheap East Asian labor sourcing) — but too many American workers may lose jobs and/or work for lower wages.  And in turn, local communities suffer.  The 2016 elections showed one of the results of that suffering as voters signalled their discontent with trade policies.

Global Trade ESG Issues

NBER researchers looked at a different topic in the trade bucket for their Working Paper: the effects of Fair Trade Certification.

The movement began led by a church-affiliated NGO in Holland and quickly spread throughout Europe and to the U.S.A. and various groups coalesced in the Fair Trade Labelling Organization (“FLO”) in 1997.

In this research effort, NBER authors Raluca Dragusanu and Nathan Nunn examined the impact of the Fair Trade movement on coffee producers in the Central American nation of Costa Rica, in the heart of the global coffee belt (typically countries near the Equator).

They looked at FLO impacts on incomes of coffee growers, their neighbors and communities.

Fair Trade policies, they assert, is a positive as it raises prices for local growers, to begin with, high enough to cover the cost of production. The higher prices are typically intended as well to raise the quality of life in the coffee-growing region.

Premium prices paid by buyers above the set minimums are used to build schools and establish scholarships, create local health care facilities, and various infrastructure, and to help improve growing practices.

Through fair trade practices, income rises in Fair Trade growing areas, for both certified growers and many of their non-growers neighbors.

Income levels were on average 3.5% higher for growers and as much as 7.5% for “skilled” coffee growers (when the “intensity of fair trade increases in an area).

The researchers found that price premiums for growers increased school enrollments (2%-to-5%) for children ages 13-to-17 — critical ages for young men and women preparing for their adult lives.

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We found this and other NBER research interesting. We have “cold, hard facts” about the economy and trade and the “what-ifs” if present trade policies and practices are messed with, and the results are in the main “unknown”.

And we see that global trade is lifting people and their communities in a Central American country where coffee growing is an important agricultural pursuit.  And a benefit of open and fair trade.

Like climate change and many other public issues, there are plusses and minuses in trade affairs — and no easy answers!

Therefore, we can argue, let reason reign, common sense be applied — and science and facts and evidence-based research be the foundations of good public sector decision-making!

Thanks to NBER researchers for their efforts (in producing more than 1,000 Working Papers a year) to continue to produce research and surface evidence that can add to be leveraged to develop both public and private sector strategies.

You can learn more at:  www.nber.org