2002 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, 2002 through December 1, 2003
Project Amount: $68,042
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
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 their relationship to pollution reduction and environmental policy. In this research project, we are undertaking a theoretical and empirical study of the effects of introducing markets for green products. The objectives of this research project are to: (1) construct a theoretical model that formalizes consumer behavior before and after introduction of a green-product market; (2) test predictions of the model in an empirical application involving the introduction of a market for green electricity; (3) estimate the economic benefits from the green market; and (4) evaluate markets for green products, and green electricity in particular.
During this reporting period, we conducted a theoretical and empirical investigation of conservation behavior that is motivated by concern for the environment. Two types of behavior are considered. First, individuals who care about environmental quality may voluntarily restrain their consumption of goods that generate a negative externality. Second, individuals may choose to pay a voluntary price premium for goods that are more "environmentally friendly." A theoretical model generates several predictions about the relationship between voluntary restraint and a voluntary price premium. The predictions then are tested in an empirical study of household electricity consumption with introduction of a price-premium, green-electricity program in Traverse City, MI. The data set combines: (1) an original household survey of participants and nonparticipants in the program; and (2) monthly panel data on household electricity consumption from 1994 to 2002, which spans the time before and after the program’s start date.
The econometric results provide strong evidence of voluntary restraint and its relation to a voluntary price premium. Households identified as conservationists (through self-reported membership in an environmental organization) consume 9 percent less conventional electricity, on average, than nonconservationist households. Upon entering the program (and paying the premium for green electricity), both conservationists and nonconservationists reduce electricity consumption. We also find evidence of a lump-sum benefit from participating in the green-electricity program. We interpret this benefit as a psychological or social benefit (e.g., warm glow, prestige) that occurs independently of electricity consumption. Overall, the results are wholly consistent with the model of conservation behavior, as none of the theoretical predictions can be rejected.
We will evaluate markets for green products, and green electricity in particular. For this, we are conducting a statistical analysis of the determinants of participation in Traverse City Light and Power's Green Rate program.