Essays on the optimal policy response to climate change

Unchecked anthropogenic climate change has the potential to destroy human lives and wealth on an unprecedented scale. This dissertation analyzes from an economic perspective various public policy options to correct the market failures caused by climate change.

The widespread adoption of environmentally friendly consumer products can reduce the impacts of climate change. The first chapter analyzes various methods of encouraging the market performance of these products. I build a model of observational learning in which a "green" consumer good enters a market to challenge an established "dirty" product. Among other results, I provide conditions for when financial incentives or informational campaigns should be more effective at encouraging the market performance of green products. I also provide a discussion and an empirical analysis of the performance of compact fluorescent light bulbs in the U.S. residential market, and compare the findings to the predictions of the theoretical model.

The second chapter provides a critic of the macroeconomic models economists have used to determine optimal climate change abatement policies. I build a model that can incorporate more realistic ranges of uncertainty for both the occurrence of catastrophic events and societal risk aversion than economists have used in the past. Numerical simulations are then used to calculate a range of risk premiums, the magnitude of which display that previous calculations of optimal carbon dioxide taxes are too imprecise to support any particular policy recommendation.

Government-backed energy-efficiency programs have become popular as components of local and national strategies to combat climate change. The effectiveness of such policies hinges on whether they provide the appropriate incentives to both energy consumers and program implementers. The third chapter analyzes evaluations of California's energy-efficiency programs to assess their effectiveness at improving our understanding of the programs' performance and providing a check on utility incentives to overstate energy savings. We find, among other results, that evaluations are useful tools to achieve both of these goals because the programs largely did not meet their energy-savings projections, and the utility savings estimates are systematically higher than the third-party savings estimates of the evaluations.