2001 Progress Report: Introducing Markets for Green Products: Product Demand, Environmental Quality & Economic WelfareEPA Grant Number: R828626
Title: Introducing Markets for Green Products: Product Demand, Environmental Quality & Economic Welfare
Investigators: Moore, Michael R. , Kotchen, Matthew J.
Institution: University of Michigan
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2001 through December 1, 2002 (Extended to June 30, 2003)
Project Period Covered by this Report: January 1, 2001 through December 1, 2002
Project Amount: $68,042
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
Objective:Markets for green products are forming to replace many pollution-generating products in the economy. Research is needed to accurately predict the potential scale of these markets and, thus, their relationship to pollution reduction and environmental policy. In this research project, a theoretical and empirical study is being conducted of the effects of introducing markets for green products. The project has four objectives: (1) construct a theoretical model that formalizes consumer behavior before and after introduction of a green-product market; (2) test predictions from the model in an empirical application involving the introduction of a market for green electricity; (3) estimate the economic benefits from a green market and assess the potential scale of the market using revealed-preference data; and (4) evaluate markets for green products, with a particular emphasis on green electricity, as an information-based approach to environmental policy.
A new theoretical model has been developed for understanding consumption of green products. A green product jointly provides a private good and an environmental public good. For example, green electricity provides conventional electrical service and air pollution reductions. The model captures a consumer's complete choice setting in a green market: a conventional private good, a green version of the good, and an opportunity to make direct donations to the environmental public good. Using the model, the potential for green markets to affect environmental quality and social welfare was investigated. In general, there is no guarantee that green markets will improve environmental quality or increase social welfare. Surprising, possibilities exist for an increase in environmental quality that makes some individuals worse off, as well as for a decrease in environmental quality that increases social welfare. Nevertheless, green markets are more likely to improve environmental quality or increase social welfare under three conditions: (1) when environmental quality is a gross complement for private consumption; (2) when fewer individuals make direct donations; and (3) when the number of consumers participating in the market is large.
Work is underway on testing model predictions in an empirical application to Traverse City Light & Power's (TCL&P) green electricity program in Traverse City, Michigan. A mail survey has been conducted of residential customers of TCL&P during summer 2001. Survey procedures followed the Dillman (1978) Total Design Method for mail surveys. The sample included 1,000 residential customers. Of the 1,000 surveys, 675 surveys were returned; 297 surveys were not returned; and 28 surveys were not deliverable. This is a response rate of 69.4 percent, which is an excellent rate for mail surveys. Data were entered in duplicate for quality assurance. We now have a complete and "cleaned" electronic data set based on the mail survey. In addition, we acquired an electronic database from TCL&P on household-level, monthly electricity consumption from 1994-2001. The data sets are being merged to enable cross-section, time-series analysis.
The economic welfare from a green market includes the benefit of providing an environmental public good. For example, by displacing conventional electricity, a green electricity program reduces air pollution emissions. Empirical models are being developed to estimate the economic benefits of voluntary contributions to environmental public goods. Finally, a theoretical model is being developed to consider the relationship between green markets and traditional forms of environmental policy. The interaction between green markets and various policy instruments may have important implications for environmental quality.