Maastricht Workshop on Applied Economics of the Environment (MAEE)

Climate change and environmental pollution are central challenges of our time. Environmental policies that can effectively and equitably incentivize the energy transition, foster climate change resilience and adaptation, and reduce the detrimental impact of environmental degradation on human well-being are urgently needed. To this end, policymakers must strike a balance between the benefits and costs of such policies. On 16 and 17 May 2024, the “Maastricht Workshop on Applied Economics of the Environment” brought together applied economists to discuss their research providing credible empirical evidence on the costs and benefits of environmental and climate change policies. The local workshop organizers Juan Palacios (SBE-FINANCE) and Nico Pestel (SBE-ROA) welcomed workshop participants studying the vast interactions between the environment, environmental policies and the functioning of the economy.

Keynote: “The EU CBAM: Did we really need it, and what to expect from it?”

Climate change is a global problem that needs global solutions. As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage'. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products are replaced by more carbon-intensive imports. The EU’s Carbon Border Adjustment Mechanism (CBAM) is the EU's tool to put a price on carbon emissions associated with the production of carbon intensive goods that are imported to the EU, and to encourage cleaner industrial production in non-EU countries. The idea of the CBAM is to ensure that the carbon price of imports is equivalent to the carbon price of domestic production by confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, such that the EU’s climate objectives are not undermined. In his keynote lecture, Antoine Dechezleprêtre, at the OECD Head of Innovation, Entrepreneurship and Technological Transitions, titled “The EU CBAM: Did we really need it, and what to expect from it?” His reading of a first analysis of the impacts of the CBAM is that there is not a huge lot to expect from it with respect to its expected effects on value-added and emissions, reflecting the small weight of covered products. But the CBAM could allow decreasing emissions both inside and outside the EU, suggesting that it is an effective anti-leakage instrument, redirecting trade flows towards countries with lower carbon intensity and higher carbon prices. The ex-post impact of the CBAM will depend on dynamic response.

The societal costs of air pollution are not limited to direct health consequences

A set of research papers presented at the workshop was devoted to the costs of poor air quality, i.e., high concentrations of fine particulate matter and other pollutants in ambient air. Marion Leroutier (Institute for Fiscal Studies) presented her research on the cost of air pollution for workers and firms based on administrative data from France. She finds that increases in fine particulate matter in a given month reduce sales in the next and following month and increase sickness-related absenteeism in same month. Hence, she concludes that stricter pollution standards could generate economic benefits currently unaccounted for in regulatory appraisals. Yichun Fan (MIT) presented her work on the quantification of the cost associated with non-market lifestyle adaptation as a response to air pollution. She uses novel data of millions of individual exercise records from one of the most popular fitness Apps in China. Her results imply a substantial reduction in physical exercise on days with high levels of air pollution. In addition, she concludes that information plays a pivotal role. Around a government-designated “heavy pollution” threshold pollution alerts double the extent of adaptation. Based on her study on the public health co-benefits of decarbonizing industrial production in Europe, Laure de Preux (Imperial College London) concludes that achieving climate goals benefiting the entire world may come with more local benefits in the form of health burden reductions in Europe.

Environmental policies may have distributional consequences

Government interventions aiming at reducing the emission of air pollutants may have distributional consequences. Olivier Deschênes (UC Santa Barbara) studies the implications of emission markets for environmental justice based on the NOx (nitrogen oxides) budget program (NBP) in the United States. He concludes that the NBP program caused large reductions in NOx emissions, primarily driven by impact on coal units, with all demographic groups benefitting from it. However, Blacks and Hispanics gain most from NBP, such that the program produces larger equity benefits than a stylized “uniform reduction” emission scenario. Traffic restrictions can significantly reduce air pollution concentrations, while bringing about important unintended and distributional effects. Marcella Veronesi (Technical University of Denmark) studies the differential impact of traffic restrictions in North Italy, where households in high-income municipalities respond by renewing their vehicles and more budget-constrained households in lower-income municipalities may cause higher congestion outside the temporal windows of the policy and more car accidents.

The complex implications of climate policies on industrial activity

Energy efficiency is usually seen as a part of the solution to reaching climate goals and that higher electricity prices incentivize a more efficient use of electricity. At the same time, industrial development requires capital-intensive production, which would require lower prices. For the case of India, Gregor Singer (LSE) shows that there may not necessarily be a trade-off. He shows that lower electricity prices can increase labor and electricity productivity. This result is relevant for industrial and environmental policy. Taxing fossil fuels while tackling excessively high industrial electricity prices can improve economic and environmental performance and benefit consumers. 

Extreme temperatures affect behavior and human capital development

Against the background of climate change and global warming, increasing the frequency of extreme temperatures across the world, a range of studies presented at the workshop were devoted to a vast set of short- and long-term effects on individual behavior and well-being as well as human capital development. For example, Martin Habets (EUI) found that temperature variation in Mexico City increases the incidence of domestic violence. The results of Giulia Martinelli (GSSI) indicate that persistently high temperatures increase the frequency of depression and anxiety in the United Kingdom. The study presented by Hannah Klauber (MCC Berlin) concludes that the occurrence of heat increases sick leave incidents among workers in Germany. In addition, extreme temperatures may affect the human capital development in both the short and long run. Elke Claes (Maastricht University) finds that especially high temperatures on test dates negatively influences primary school students’ performance in the Netherlands. This is complemented by the findings of Giulia Valenti (Ca’ Foscari University of Venice), showing that exposure to extreme temperatures during childhood may have long-term negative consequences for health capital in European countries.

Summary and outlook

The workshop presentations have underlined that poor environmental quality alongside accelerating climate change are associated with substantial social and economic costs as well as distributional impacts in both the short and long run. These range from direct health impacts to broader disruptions affecting economies at large. Consequently, societies worldwide confront these environmental challenges through comprehensive efforts aimed at securing a sustainable future for planet earth. However, the implications of environmental policies for industrial activity and the functioning of the economy more broadly are complex and may have unintended consequences. For this reason, further research building a robust foundation of empirical evidence on the economic impacts of government intervention is necessary. 

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