Environment, Energy, and Unintended Consequences.

• Author: Kotchen, Matthew J.
• Position: Research Summaries

Economists are fascinated with unintended consequences. A policy designed to accomplish a particular objective will sometimes have the opposite effect, or create new problems apart from the one it originally sought to correct. Well-intentioned individuals will sometimes make choices that are counterproductive to the very causes they seek to support. Understanding the full impact of policy interventions and individual choices is critical for the design, implementation, and improvement of more effective and efficient policies.

Much of my research over the last 15 years has focused on unintended consequences in the field of environmental and energy economics and policy. The starting point is often a simple question: Does a specific policy or choice that is driven by concern for environmental protection or energy conservation deliver on its promise, and if not, why not? Research attempting to answer this question has led to contributions to economic theory on the private provision of public goods and to empirical studies on a range of topics such as renewable energy, corporate social responsibility, daylight saving time, building codes, and electric cars.

Private Provision of Environmental Public Goods

Many individuals are concerned with the environmental impact of their consumption choices, and these concerns have driven the emergence of markets for environmentally friendly goods and services. My first theoretical contribution was to model "green goods," based on joint production of a private good and a public environmental good. (1) The purchase of electricity from renewable sources of energy provides an example. While green electricity may cost more than electricity generated from fossil fuels, it produces the joint products of electricity (a private good) and lower emissions (a public good).

Does this mean green products are always beneficial for the environment? The answer turns out to depend on whether there are opportunities to provide the public good separately. It is possible, for example, that one's purchase of green electricity crowds out other activities that reduce emissions. In such cases, introducing a green good can counterintuitively increase pollution and reduce economic welfare.

In a subsequent theoretical paper, I consider joint production that is instead based on the private provision of a public "bad." (2) The setup more closely aligns with the way economists typically think about particular goods and services generating a negative externality. A novel feature of the model is the way that consumers can make donations that are motivated, in part, to offset the negative externality. In this context, I show how donations and economic welfare differ from the standard model for privately provided public goods.

One general result is that donations continue to increase, rather than decrease, as an economy grows. Moreover, an unintended consequence of this market arrangement is that the opportunity to make offsetting donations will typically stimulate demand for the externality-causing good. For example, the ability to purchase a carbon offset might help an individual justify the purchase of a less fuel-efficient car. Indeed, the theory provides a framework for understanding markets for environmental offsets, with those that promote carbon neutrality in response to climate change being an increasingly salient example.

Offsetting Goods and Bads

Does giving consumers a way...