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.