Conventional hedonic techniques for estimating the value of local amenities rely on the assumption that households move freely among locations. We show that when moving is costly, the variation in housing prices and wages across locations may no longer reflect the value of differences in local amenities. We develop an alternative discrete-choice approach that models the household location decision directly, and we apply it to the case of air quality in U.S. metro areas in 1990 and 2000. Because air pollution is likely to be correlated with unobservable local characteristics such as economic activity, we instrument for air quality using the contribution of distant sources to local pollution-excluding emissions from local sources, which are most likely to be correlated with local conditions. Our model yields an estimated elasticity of willingness to pay with respect to air quality of 0.34 to 0.42. These estimates imply that the median household would pay $149 to $185 (in constant 1982-1984 dollars) for a one-unit reduction in average ambient concentrations of particulate matter. These estimates are three times greater than the marginal willingness to pay estimated by a conventional hedonic model using the same data. Our results are robust to a range of covariates, instrumenting strategies, and functional form assumptions. The findings also confirm the importance of instrumenting for local air pollution.

Both 20- and 100-year time scales should always be reported

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Conventional hedonic techniques for estimating the value of local amenities rely on the assumption that households move freely among locations. We show that when moving is costly, the variation in housing prices and wages across locations may no longer reflect the value of differences in local amenities. We develop an alternative discrete-choice approach that models the household location decision directly, and we apply it to the case of air quality in U.S. metro areas in 1990 and 2000. Because air pollution is likely to be correlated with unobservable local characteristics such as economic activity, we instrument for air quality using the contribution of distant sources to local pollution -excluding emissions from local sources, which are most likely to be correlated with local conditions. Our model yields an estimated elasticity of willingness to pay with respect to air quality of 0.34 to 0.42. These estimates imply that the median household would pay $149 to $185 (in constant 1982-1984 dollars) for a one-unit reduction in average ambient concentrations of particulate matter. These estimates are three times greater than the marginal willingness to pay estimated by a conventional hedonic model using the same data. Our results are robust to a range of covariates, instrumenting strategies, and functional form assumptions. The findings also confirm the importance of instrumenting for local air pollution.Keywords: Particulate matter, valuation of air quality, wage-hedonic models, migration costs, residential sorting, discrete choice models

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This paper proposes the creation of a club of carbon markets (CCM), to promote deep reductions in greenhouse gas emissions by supporting the development, harmonization, and increased ambition of domestic carbon markets. To achieve its aims, the club would establish common or reciprocal standards for environmental market infrastructure, transparency and environmental integrity; offer mutual recognition of members' emissions units; allow participating jurisdictions to share experience and gain assistance in building institutional capacity; and promote domestic and cross-border investment in low-carbon development. Using a suite of incentives, including some from the trade arena, a club of carbon markets could serve as a powerful attractive nucleus for broadening the participation of jurisdictions in climate mitigation, much as the General Agreement on Tariffs and Trade (GATT) served as the nucleus for broadening trade in products and services. A carbon markets club could be launched under UNFCCC auspices, but a more promising avenue might be to pursue the creation of the CCM as a complement to but outside the UN talks.

This essay offers a comprehensive assessment of the cost savings over the first five years of the allowance trading program. The current study has two methodological advantages over the previous ones. The first is the completeness of the data used. Like the two previous studies, this study estimates scrubber costs from costs reported in survey data, although the current study is able to use cost data from the full five years of Phase I. The data on coal prices used here are much more detailed than that in the other two studies, allowing for plant-level estimates of sulfur premia and counterfactual sulfur content. The second and more significant advantage of the current study is methodological. It employs an econometric model of the abatement choices actually made by utilities to simulate the decisions that would have been made under prescriptive regulation. Thus, abatement costs under counterfactual policies are estimated on the basis of observed behavior under actual policy regimes, rather than on the basis of engineering estimates or least-cost algorithms.

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