“Economic Modeling and the False Tradeoff Between Environmental Protection and Economic Growth” Contemporary Economic Policy 15, 1997

Abstract

One important element of the current policy debate on what measures should be taken to reduce greenhouse gas emissions is the controversy over the costs of reducing those emissions. “Top-down ” macroeconomic and general equilibrium models give much higher estimates of the costs than “bottom-up” models based on  microeconomic and engineering data. This paper investigates the causes of the divergence between the two modeling approaches. The conventional top-down models incorporate strong implicit assumptions about maximization, technical progress, and organizational efficiency that predetermine their results.  However, these assumptions are questionable on both theoretical and  empirical grounds. Economic assessment of policy alternatives would benefit from analyses that take account of the actual characteristics of business firms and other organizations
that emit greenhouse gases in the course of their activities.

“The Efficiency Paradox: Bureaucratic and Organizational Barriers to Profitable Energy-Saving Investments” Energy Policy 26, 1998

Abstract

The paradox of why profitable energy-saving investments are not undertaken continues to provoke debate. The underlying phenomenon might be called the ‘efficiency paradox,’ because it represents a case in which business firms, which are often presumed (or taken axiomatically) to be economically efficient, make decisions that  do  not maximize profits. New data from one of the US Environmental Protection Agency’s voluntary pollution prevention programs enables this paradox to be explored statistically. The data show that both the level and variation in returns to lighting upgrade investments cannot be explained by standard economic models. Substantial gains in energy efficiency can be achieved without sacrificing profitability. Both economic and organizational factors account for some of the variation in observed returns to these investments, but the results suggest a need for improved and more comprehensive theories of the investment behavior of firms and other organizations.

“Information Processing and Organizational Structure” (with William E. Watkins) Journal of Economic Behavior and Organization 36, 1998

Abstract

Standard economic theories of the firm (and other organizations) stress profit maximization as the foundation for derivation of predictable behavior. Yet statistical and case-study evidence continues to accumulate that real firms do not act as required by the neoclassical framework.  Instead of being represented by ever more elaborate maximization models, the firm can be modeled simply as a network of information-processing agents. The actions of the firm are then a function only of the network structure and the information-processing capabilities of the agents. This approach can be used to explain a number of features of organizational behavior, including the process of technological diffusion. It also suggests that derivation of the optimal organizational structure may be computationally complex, with a number of implications for economic theory and policy development.

“Estimating the Non-Environmental Consequences of Greenhouse Gas Reductions is Harder Than You Think” Contemporary Economic Policy 17, 1999

Abstract

Top-down and bottom-up models of the non-environmental consequences of policies to reduce greenhouse gas emissions embody different implicit theories of economic organizations. Yet neither approach is explicit in showing the detailed computations that must be traced if the activities of firms are to be described realistically. Specification of firms’ computational processes leads inevitably to a consideration of potential computational limits on the behavior of organizations. It is known that solutions of some standard economic problems are not effectively computable, and that the solutions to others are computationally intractable. These fundamental computational limits have strong implications for the theory of the firm, and recognizing their existence and importance suggests new policy approaches for reducing greenhouse gas emissions.

“Organizational Structure and the Behavior of Firms: Implications for Integrated Assessment” (with Catherine Dibble and Keyvan Amir-Atefi) Climatic Change 48, 2001

Abstract

Existing climate/economy models typically treat production through the assumptions that firms maximize profits and that inputs are transformed to outputs according to a neoclassical production function. Yet these assumptions are at variance with some of the known empirical features of business behavior. One of the most promising ways to model firms more realistically is to include organizational network structure as an integral part of the representation. The firm’s optimization problem then includes not only the choice of inputs and outputs, but the choice of an organizational structure as well. This approach makes it possible to examine in a unified framework a number of issues pertaining to the internal workings of the firm: the consequences of multiple organizational objectives, the possible existence of productivity spillovers from one activity to another, and the algorithmic characteristics of procedural routines. Understanding how organizational structures influence overall performance is an important step towards better representing firms in integrated assessment models. Our results show that phenomena of the type characterizing the ‘Porter hypothesis’ (improved environmental performance without reduction in productivity or profitability) can appear even in very simple models of the firm, provided the effects of organizational structure are taken into account.

“Cutting Carbon Emissions at a Profit (Part I): Opportunities for the U.S.” (with Florentin Krause, J. Andrew Hoerner, and Paul Baer) Contemporary Economic Policy 20, 2002

Abstract

This article identifies and corrects shortcomings in recent modeling studies on the economics of reducing greenhouse gas emissions in the United States. The major assessments of the Kyoto Protocol — by the U.S. Energy Information Administration, the Clinton White House Council of Economic Advisers, the U.S. Department of Energy Interlaboratory Working Group, and the Stanford Energy Modeling Forum­ — are found to be seriously incomplete. Each study omits one or several of four major cost-reducing policy options, resulting in cost estimates that are far too pessimistic.

In the present study, these shortcomings are overcome through the integrated eval­uation of all major cost-cutting policy options within a coherent least-cost frame­work. Three domestic policies — a national carbon cap and permit trading program, productivity-enhancing market reforms and technology programs, and recycling of permit auction revenues into economically advantageous tax cuts — are combined with international emissions allowance trading.

This analysis shows that an integrated least-cost strategy for mitigating US. green­house gas emissions would produce an annual net output gain of roughly 0.4% of GDP in 2010 and about 0.9% of GDP in 2020. On a cumulative net present value basis, the United States would gain $250 billion by 2010 and $600 billion by 2020. International flexibility mechanisms (including emissions trading) are of only secondary significance in realizing these productivity, output, and welfare gains. (JEL Q43, Q48)

“Economic Analysis, Environmental Policy, and Intergenerational Justice in the Reagan Administration: The Case of the Montreal Protocol” International Environmental Agreements: Politics, Law and Economics 3, 2003

Abstract

Economic arguments played a significant role in the decision by the Reagan Administration to lead the international effort to protect the stratospheric ozone layer from depletion caused by certain otherwise useful industrial chemicals. During the period prior to the signing of the Montreal Protocol on Substances that Deplete the Ozone Layer in 1987, it was recognized within the Administration that ethical considerations (involving the valuation of risk and intergenerational equity) were essential components of the economic analysis. Adoption of a principle of intergenerational neutrality had the consequence that any reasonable comparison of the benefits of ozone layer protection to the costs of regulatory control overwhelmingly favored regulation.

“Descriptive or Conceptual Models? Contributions of Economics to the Climate Policy Debate” International Environmental Agreements: Politics, Law and Economics 5, 2005

Abstract

Economists have brought two distinct modeling styles to the debate on climate policy. Some attempt to forecast the effects of policy decisions by constructing models that purport to be ‘‘descriptive’’ of the global economic system. The alternative approach is a ‘‘conceptual’’ focus on key elements of a particular economic or environmental issue. The descriptive models typically offer numerical comparisons of policy scenarios to a baseline, while the conceptual modelers often seek to provide insight into the ethical foundations or implications of different assumptions. These different modeling styles exhibit both contrasts and areas of overlap in their policy implications.