Grantee Research Project Results
2001 Progress Report: Environmental Policy and Endogenous Technical Change: A Theoretical & Empirical Analysis
EPA Grant Number: R826610Title: Environmental Policy and Endogenous Technical Change: A Theoretical & Empirical Analysis
Investigators: Opaluch, James J. , Grigalunas, Thomas A. , Jin, Di
Institution: University of Rhode Island , Woods Hole Oceanographic Institution
EPA Project Officer: Chung, Serena
Project Period: October 1, 1998 through September 30, 2001
Project Period Covered by this Report: October 1, 2000 through September 30, 2001
Project Amount: $325,000
RFA: Decision-Making and Valuation for Environmental Policy (1998) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objectives of this research project are to: (1) develop a deeper understanding of the relationship between technical change and alternative environmental policies that accounts for environmental inputs and depletion of natural capital stocks; (2) use a case study to measure historic rates of technical change, accounting for environmental inputs; (3) compare ex ante, engineering estimates of the costs of complying with environmental regulations to actual, ex post performance that includes innovative means of achieving standards such as process change; (4) estimate benefits of environmental policies that provide increased flexibility and that encourage innovation; and (5) simulate the long-run relationship between productivity change and environmental protection.Progress Summary:
Work on measuring and decomposing productivity change is nearing completion. The traditional issue of technological change has been recast by recognizing that production of market goods implicitly embodies joint production of market outputs and environmental commodities. Measures of productivity change should include both market and non-market outputs.Data envelopment analysis (Charnes, et al., 1978; Fare, et al., 1985) has been applied to measure productivity change in the Gulf of Mexico offshore oil and gas production. This is an important application because energy resources are central to sustaining the economy, and because petroleum products currently are the key energy resources. For purposes of this project, a unique micro-level data set was developed that is comprised of the following: (1) production data, including monthly oil, gas, and produced water outputs from every well in the Gulf of Mexico from 1947 to 1998?the data include a total of 5,064,843 observations for 28,946 production wells; (2) borehole data describing drilling activity of each of 37,075 wells drilled from 1947 to 1998; (3) platform data with information on each of 5,997 platforms, including substructures, from 1947 to 1998; (4) field reserve data, including oil and gas reserve sizes and the discovery year of each of 957 fields from 1947 to 1997; and (5) reservoir-level porosity information from 1974 to 2000?the data include a total of 15,939 porosity measurements from 390 fields.
It has been determined that efficiency analysis is better focused at the field level rather than the well level, so the production data were aggregated into 18,117 observations on annual production from 933 fields over 50 years and used for the analyses described below. The first product of the project focuses on the relative sizes of depletion effects and technological progress for offshore oil production in the Gulf of Mexico, using the field-level data set described above. Previous innovation measures (Cuddington and Moss, 2001) were updated and adapted. The Cuddington and Moss index is based on a simple count of innovations. A National Petroleum Council industry survey of technology needs (NPC, 1995) was used to create an importance-weighted index.
The study supports the hypothesis that technological progress has mitigated depletion effects over the study period, but the pattern differs from the conventional wisdom for non-renewable resource industries. Contrary to the usual assumptions of monotonic changes in productivity or an inverted "U" shaped pattern, productivity declined for the first 30 years of the study period. More recently, the rapid pace of technological change has outpaced depletion, and productivity has increased rapidly, particularly in the most recent 5 years of the study period. This is consistent with reports of accelerating technological progress in recent years (Bohi, 1998).
A more thorough understanding of different components of technological change and depletion also is provided. It has been determined that both diffusion and "learning by doing" play more important roles in productivity change than innovations based on specific new discoveries. Early in the time series, field size is a more important determinant of productivity effects of depletion; later in the time series, water depth is more important. This is consistent with findings of large fields in increasingly deep waters in recent years.
To study finds of new fields, data were aggregated over all fields to calculate total annual production in the Gulf of Mexico. A yield per unit effort (YPE) model was employed that relates discoveries to the aggregate "effort" placed in exploration. With an increasing pace of technological change, net productivity has been increasing in recent years; however, recent productivity increases have not overcome depletion-related productivity declines of the earlier years (late 1940s through the 1970s).
The Porter hypothesis was examined, and a revised version was tested. The Porter hypothesis states that strict environmental regulations can induce firms to innovate and become more efficient, ultimately contributing to productive efficiency and profitability. The Porter hypothesis was recast to include joint market and non-market outputs (Repetto, 1996). Thus, productive efficiency is measured by taking into account not only market outputs, but also pollution levels that affect the supply of environmental commodities.
The results show a long-run upward trend in the productivity of environmental technologies. The results also support a recast version of the Porter hypothesis, where efficiency is measured with respect to joint products comprised of vectors of market and environmental commodities. Of course, the causality between innovation and stringency of environmental regulations could go in either direction. More stringent environmental regulations could result in innovation to overcome increased costs, or technological innovation could result in more stringent technology-based environmental regulations. Granger causality tests were used to determine the direction of causality between innovation and environmental regulation. Although there are no firm conclusions of the causal relationship between environmental stringency and technological innovation (new inventions), a clear causal direction was found from environmental stringency to less structural aspects of innovation, such as "learning by doing."
The final paper compares alternative measures of technological change to assess whether some proxies perform better than others in offshore oil and gas industry. The use of patents, weighted patents, direct innovation counting, and weighted innovation counting were compared. The initial analysis finds that all of the proxies fit relatively well as an approximation in cumulative case, but none of the alternative innovation indexes appears to be clearly superior to the others. Cumulative innovation indexes appear much more promising than incremental innovation indexes as a proxy measure of innovation. This suggests that there may be a problem of using proxy measurement for short-term analysis.
Future Activities:
The next step in the research is to develop an industry simulation model to simulate alternative futures of the industry. Historic data will be used to simulate evolution of the industry to date. The future of the offshore oil industry will be simulated under alternative assumptions regarding future production activities, parameters regarding technical change, and alternative environmental policies. Various policy issues will be addressed, such as identifying potential benefits from innovative pollution control measures, and the associated benefits of that can be derived from flexible approaches, such as market-based approaches for pollution control. Given the inherent uncertainties involved, the emphasis is on developing a reasonable range of benefits that might result and identifying critical parameters through the use of sensitivity analyses. Additional data are needed to develop more refined analyses.Journal Articles:
No journal articles submitted with this report: View all 8 publications for this projectSupplemental Keywords:
petroleum, productivity, innovative technology, economics, technical change, offshore oil, Porter hypothesis., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics, decision-making, Engineering, Economics & Decision Making, ecosystem valuation, technical innovation, decision making, economic benefits, endogenous technical change, offshore oil, cost benefit, economic incentives, empirical analysis, environmental policy, theoretical analysis, compliance costs, innovative pollution control, benefits assessmentRelevant Websites:
Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.