Environmental Policy, Greenhouse Gas Polluting Inputs, and Lifecycle Analysis

Boying Liu

This dissertation consists of three studies that investigate impact of environmental taxes on firms' technology and entry behaviors, substitution between greenhouse gas (GHG) polluting and nonpolluting inputs in agricultural production, and lifecycle emissions with incorporation of input substitution in production and transportation sectors of biofuel. The first study examines under which conditions an environmental tax can be used to induce firms to adopt a clean technology and, also, to deter entry. We find that despite facing a polluting incumbent, an entrant might enter the market and acquire a clean technology when the tax is stringent enough and the clean technology is effective in eliminating pollution. A duopoly with two clean firms is socially optimal if the technology cost is low and the environmental damage is sufficiently high. However, if the environmental damage is low, a partially clean duopoly, in which only one firm adopts the green technology, could be socially optimal. The second study reports meta-regressions of Morishima substitution elasticities between GHG polluting and each of three nonpolluting inputs (labor, land, and capital) in agricultural production. We treat energy, fertilizer, and manure collectively as the "polluting input". Our results show that each estimated long-run elasticity for the reference case, which is most relevant for assessing GHG emissions through lifecycle analysis, is greater than 1.0 and significantly different from zero. Predicted long-run elasticities generally remain significantly different from zero at the data means for alternative plausible cases. These findings imply that lifecycle analysis based on fixed proportions production functions could provide grossly inaccurate measures of GHG of biofuel. The third study develops a lifecycle economic analysis (LCEA) model that integrates input substitution, technology switching, and substitution of biodiesel for diesel into the standard lifecycle analysis (LCA) of biofuel that assumes fixed-proportions production. We use the LCEA model to examine the impacts of a pure carbon tax and a revenue-neutral tax-subsidy policy on lifecycle greenhouse gas emissions from cellulosic ethanol using forest residues as feedstock in Washington State. Our findings document that a standard LCA that assumes fixed input proportions substantially underestimates emission reduction from carbon tax policies.

Environmental Policy, Greenhouse Gas Polluting Inputs, and Lifecycle Analysis

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