Derek Lemoine

I show that persistent underconfidence and overconfidence can each arise from rational Bayesian learning when effort and ability are complementary. Which arises depends on the decision-making environment, and in particular on the effect that greater effort has on the variance of outcomes. Agents learn away overconfidence and underconfidence at asymmetric rates because (i) Bayesian updating requires that their sensitivity to new information depend on their effort choices and (ii) their effort choices in turn depend on beliefs about their own ability. As one implication, I show that management can credibly induce additional effort from employees by designing feedback that generates average overconfidence through being conditionally vague.

Financial markets value skillful forecasts of seasonal climate (pdf, The Conversation, ENSO Blog, Science Featured)

Lemoine, D. and S. Kapnick. 2024. Nature Communications 15(1):4059. doi:10.1038/s41467-024-48420-z

Scientific agencies spend substantial sums producing and improving forecasts of seasonal climate, but they do so without much information about these forecasts’ value in practice. Here we show that financial market participants value the production of seasonal forecasts: options traders price the uncertainty generated by upcoming United States National Oceanic and Atmospheric Administration Winter and El Niño Outlooks. Each outlook affects firms throughout the economy, with total market capitalization of $6 and $13 trillion, respectively. A 1% improvement in the skill of the El Niño Outlook reduces firms’ exposure to a one standard deviation shock by $18 billion and induces traders to spend an additional $2 million hedging the outlook’s news. Firms must not be able to undertake ex-ante adaptation that would eliminate their exposure to the forecasted portion of seasonal climate without imposing substantial costs of its own.

Innovation-Led Transitions in Energy Supply (pdf Copyright American Economic Association; reproduced with permission)

Lemoine, D. 2024. American Economic Journal: Macroeconomics 16(1):29-65. doi: 10.1257/mac.20200369

Generalizing models of directed technical change, I show that complementarities between innovations and factors of production (here, energy resources) can drive transitions away from a dominant sector. In a calibrated numerical implementation, the economy gradually transitions energy supply from coal to gas and then to renewable energy, even in the absence of policy. The welfare-maximizing tax on carbon emissions is J-shaped, immediately redirects most research to renewables, and rapidly transitions energy supply directly to renewables. The emission tax is twice as valuable as either the welfare-maximizing research subsidy or the welfare-maximizing mandate to use renewable resources.

Designing Dynamic Subsidies to Spur Adoption of New Technologies (pdf)

Langer, A. and D. Lemoine. 2022. Journal of the Association of Environmental and Resource Economists 9(6):1197-1234. doi: 10.1086/719949

Selected 2022's Outstanding Publication in JAERE

We analyze the efficient subsidy for durable good technologies. We theoretically demonstrate that a policy maker faces a tension between intertemporally price discriminating by designing a subsidy that increases over time and taking advantage of future technological progress by designing a subsidy that decreases over time. Using dynamic estimates of household preferences for residential solar in California, we show that the efficient subsidy increases over time. The regulator’s spending quintuples when households anticipate future technological progress and future subsidies.

The Climate Risk Premium: How Uncertainty Affects the Social Cost of Carbon (pdf)

Lemoine, D. 2021. Journal of the Association of Environmental and Resource Economists 8(1):27-57. doi: 10.1086/710667

I analyze the marginal value of reducing greenhouse gas emissions (the “social cost of carbon”) under uncertainty about warming, under uncertainty about how much warming reduces consumption, and under stochastic shocks to consumption growth. I theoretically demonstrate that each of these sources of uncertainty increases the social cost of carbon under conventional preferences. In a calibrated numerical implementation, uncertainty increases the 200-year social cost of carbon by more than 20%. Uncertainty about the consumption impacts of warming contributes the most to this premium and makes the social cost of carbon sensitive to impacts even after 2400.

General Equilibrium Rebound from Energy Efficiency Innovation (pdf)

Lemoine, D. 2020. European Economic Review 125:103431. doi: 10.1016/j.euroecorev.2020.103431

Energy efficiency improvements "rebound" when economic responses undercut their direct energy savings. I show that general equilibrium channels typically amplify rebound by making consumption goods cheaper but typically dampen rebound by increasing demand for non-energy inputs to production and by changing the size of the energy supply sector. Improvements in the efficiency of the energy supply sector generate especially large rebound because they make energy cheaper in all other sectors. Quantitatively, general equilibrium channels reduce rebound in U.S. consumption good sectors from 39% to 28% but increase rebound in the energy supply sector from 42% to 80%.

Age-Induced Acceleration of Time: Implications for Intertemporal Choice

Lemoine, D. 2018. Journal of Economic Behavior and Organization 153:143-152. doi:10.1016/j.jebo.2018.07.002

Working paper version

Our perception of time is both nonlinear and nonstationary, which makes preference reversals possible. I decompose the sources of dynamic inconsistency into a time acceleration effect and a time compression effect. Standard economic models focus only on the second effect. I show that when the perceived flow of time accelerates with age, the two effects can offset each other for hyperbolic discounters but not for exponential discounters. Such hyperbolic discounters would report discount rates that seem to imply dynamic inconsistency but would nonetheless manifest dynamic consistency in actual choices over time.

Steering the Climate System: Using Inertia to Lower the Cost of Policy (pdf)

Lemoine, D. and I. Rudik. 2017. American Economic Review 107(10):2947-57. doi: 10.1257/aer.20150986

Reply (AER 2020)

Common views hold that the efficient way to limit warming to a chosen level is to price carbon emissions at a rate that increases exponentially. We show that this "Hotelling" tax on carbon emissions is actually inefficient. The least-cost policy path takes advantage of the climate system's inertia to delay reducing emissions and allow greater cumulative emissions. The efficient carbon tax follows an inverse-U-shaped path and grows more slowly than the Hotelling tax. Economic models that assume exponentially increasing carbon taxes are overestimating the cost of limiting warming, overestimating the efficient near-term carbon tax, and overvaluing technologies that mature sooner.

Green Expectations: Current Effects of Anticipated Carbon Pricing (pdf, copyright MIT Press)

Lemoine, D. 2017. Review of Economics and Statistics 99(3):499-513. doi: 10.1162/REST_a_00627

I report evidence that an anticipated strengthening of environmental policy increased emissions. I find that the breakdown of the U.S. Senate's 2010 climate effort generated positive excess returns in coal futures markets. This response appears to be driven by an increase in coal storage. The proposed legislation aimed to reduce U.S. greenhouse gas emissions after 2013, but the legislative process itself may have increased emissions by over 12 million tons of carbon dioxide leading up to April 2010.

Managing Climate Change Under Uncertainty: Recursive Integrated Assessment at an Inflection Point

Lemoine, D. and I. Rudik. 2017. Annual Review of Resource Economics 9:117-142. doi: 10.1146/annurev-resource-100516-053516

Link for complimentary access

Code for recursive dynamic version of DICE

Uncertainty is critical to questions about climate change policy. Recently developed recursive integrated assessment models have become the primary tools for studying and quantifying the policy implications of uncertainty. We decompose the channels through which uncertainty affects policy and quantify them in a recursive extension of a benchmark integrated assessment model. The first wave of recursive models has made valuable, pioneering efforts at analyzing disparate sources of uncertainty. We argue that frontier numerical methods will enable the next generation of recursive models to better capture the information structure of climate change and to thereby ask new types of questions about climate change policy.

Escape from Third-Best: Rating Emissions for Intensity Standards (free version)

Lemoine, D. 2017. Environmental and Resource Economics 67(4):789-821. doi: 10.1007/s10640-016-0006-6

An increasingly common type of environmental policy instrument regulates the carbon intensity of transportation and electricity markets. In order to extend the policy's scope beyond point-of-use emissions, regulators assign each potential fuel an emission intensity rating for use in calculating compliance. I show that welfare-maximizing ratings do not generally coincide with the best estimates of actual emissions. In fact, the regulator can achieve a higher level of welfare by properly selecting the emission ratings than possible by selecting only the level of the standard. Moreover, a fuel's optimal rating can actually decrease when its estimated emission intensity increases. Numerical simulations of the California Low-Carbon Fuel Standard suggest that when recent scientific information increased the estimated emissions from conventional ethanol, regulators should have lowered ethanol's rating (making it appear less emission-intensive) so that the fuel market would clear with a lower quantity.

Economics of Tipping the Climate Dominoes

Lemoine, D. and C.P. Traeger. 2016. Nature Climate Change 6(5):514-519.doi:10.1038/nclimate2902

Free version (Supplementary Information)

Greenhouse gas emissions can trigger irreversible regime shifts in the climate system, known as tipping points. Multiple tipping points affect each other’s probability of occurrence, potentially causing a ‘domino effect’. We analyse climate policy in the presence of a potential domino effect. We incorporate three different tipping points occurring at unknown thresholds into an integrated climate–economy model. The optimal emission policy considers all possible thresholds and the resulting interactions between tipping points, economic activity, and policy responses into the indefinite future. We quantify the cost of delaying optimal emission controls in the presence of uncertain tipping points and also the benefit of detecting when individual tipping points have been triggered. We show that the presence of these tipping points nearly doubles today’s optimal carbon tax and reduces peak warming along the optimal path by approximately 1 °C. The presence of these tipping points increases the cost of delaying optimal policy until mid-century by nearly 150%.

A Top-Down Approach to Projecting Market Impacts of Climate Change

Lemoine, D. and S. Kapnick. 2016. Nature Climate Change 6(1):51-55. doi:10.1038/nclimate2759

Free version (Supplementary Information and social cost of carbon analysis)

To evaluate policies to reduce greenhouse-gas emissions, economic models require estimates of how future climate change will affect well-being. So far, nearly all estimates of the economic impacts of future warming have been developed by combining estimates of impacts in individual sectors of the economy. Recent work has used variation in warming over time and space to produce top-down estimates of how past climate and weather shocks have affected economic output. Here we propose a statistical framework for converting these top-down estimates of past economic costs of regional warming into projections of the economic cost of future global warming. Combining the latest physical climate models, socioeconomic projections, and economic estimates of past impacts, we find that future warming could raise the expected rate of economic growth in richer countries, reduce the expected rate of economic growth in poorer countries, and increase the variability of growth by increasing the climate’s variability. This study suggests we should rethink the focus on global impacts and the use of deterministic frameworks for modelling impacts and policy. Press Releases: UA News, NOAA

Media: New Scientist Magazine, ClimateWire

Ambiguous Tipping Points

Lemoine, D. and C.P. Traeger. 2016. Journal of Economic Behavior & Organization 132:5-18. doi:10.1016/j.jebo.2016.03.009

Free working paper version

We analyze the policy implications of aversion to Knightian uncertainty (ambiguity) about the possibility of tipping points. We demonstrate two channels through which uncertainty aversion affects optimal policy in the general setting. The first channel relates to the policy's effect on the probability of tipping, and the second channel to its differential impact in the pre- and post-tipping regimes. We then extend a recursive dynamic model of climate policy and tipping points to include uncertainty aversion. Numerically, aversion to Knightian uncertainty in the face of an ambiguous tipping point increases the optimal tax on carbon dioxide emissions, but only by a small amount.

Watch Your Step: Optimal Policy in a Tipping Climate (pdf)

Lemoine, D. and C. Traeger. 2014. American Economic Journal: Economic Policy 6(1):137-166. doi:10.1257/pol.6.1.137

NBER working paper version (Tipping Points and Ambiguity in the Economics of Climate Change)

Matlab code

We investigate the optimal policy response to the possibility of abrupt, irreversible shifts in system dynamics. The welfare cost of a tipping point emerges from the policymaker's response to altered system dynamics. Our policymaker also learns about a threshold's location by observing the system's response in each period. Simulations with a recursive, numerical climate-economy model show that tipping possibilities raise the optimal carbon tax more strongly over time. The resulting policy paths ultimately lower optimal peak warming by up to 0.5 degrees C. Different types of post-tipping shifts in dynamics generate qualitatively different optimal pre-tipping policy paths.

PAGES newsletter perspective on abrupt change (Feb 2012)

The Economics of Solar Electricity

Baker, E., M. Fowlie, D. Lemoine, and S.S. Reynolds. 2013. Annual Review of Resource Economics 5(1):387-426. doi:10.1146/annurev-resource-091912-151843

Link for complimentary access

The benefits and costs of increasing solar electricity generation depend on the scale of the increase and on the timeframe over which it occurs. Short-run analyses focus on the cost-effectiveness of incremental increases in solar capacity, holding the rest of the power system fixed. Solar's variability adds value if its power occurs at high-demand times and displaces relatively carbon-intensive generation. Medium-run analyses consider the implications of non-incremental changes in solar capacity. The cost of each installation may fall through experience effects, but the cost of grid integration increases when solar requires ancillary services and fails to displace investment in other types of generation. Long-run analyses consider the role of solar in reaching twenty-first century carbon targets. Solar's contribution depends on the representation of grid integration costs, on the availability of other low-carbon technologies, and on the potential for technological advances. By surveying analyses for different time horizons, this paper begins to connect and integrate a fairly disjointed literature on the economics of solar energy.

Trapped Between Two Tails: Trading Off Scientific Uncertainties via Climate Targets

Lemoine, D. and H.C. McJeon. 2013. Environmental Research Letters 8:034019. doi:10.1088/1748-9326/8/3/034019

Climate change policies must trade off uncertainties about future warming, about the social and ecological impacts of warming, and about the cost of reducing greenhouse gas emissions. We show that laxer carbon targets produce broader distributions for climate damages, skewed towards severe outcomes. However, if potential low-carbon technologies fill overlapping niches, then more stringent carbon targets produce broader distributions for the cost of reducing emissions, skewed towards high-cost outcomes. We use the technology-rich GCAM integrated assessment model to assess the robustness of 450 ppm and 500 ppm carbon targets to each uncertain factor. The 500 ppm target provides net benefits across a broad range of futures. The 450 ppm target provides net benefits only when impacts are greater than conventionally assumed, when multiple technological breakthroughs lower the cost of abatement, or when evaluated with a low discount rate. Policy evaluations are more sensitive to uncertainty about abatement technology and impacts than to uncertainty about warming.

environmentalresearchweb story (Oct 2, 2013)

Climate sensitivity distributions depend on the possibility that models share biases (pdf)

Lemoine, D.M. 2010. Journal of Climate 23(16):4395-4415. doi:10.1175/2010JCLI3503.1

Uncertainty about biases common across models and about unknown and unmodeled feedbacks is important for the tails of temperature change distributions and thus for climate risk assessments. This paper develops a hierarchical Bayes framework that explicitly represents these and other sources of uncertainty. It then uses models' estimates of albedo, carbon cycle, cloud, and water vapor-lapse rate feedbacks to generate posterior probability distributions for feedback strength and equilibrium temperature change. The posterior distributions are especially sensitive to prior beliefs about models' shared structural biases: nonzero probability of shared bias moves some probability mass towards lower values for climate sensitivity even as it thickens the distribution's positive tail. Obtaining additional models of these feedbacks would not constrain the posterior distributions as much as would narrowing prior beliefs about shared biases or, potentially, obtaining feedback estimates having biases uncorrelated with those impacting climate models. Carbon dioxide concentrations may need to fall below current levels in order to maintain only a 10% chance of exceeding official 2 degrees Celsius limits on global average temperature change.

Coverage by Green Car Congress (August 22, 2010)

Paleoclimatic warming increased carbon dioxide concentrations (pdf)

Lemoine, D.M. 2010. Journal of Geophysical Research 115:D22122. doi:10.1029/2010JD014725

If climate-carbon feedbacks are positive, then warming causes changes in carbon dioxide (CO2) sources and sinks that increase CO2 concentrations and create further warming. Previous work using paleoclimatic reconstructions has not disentangled the causal effect of interest from the effects of reverse causality and autocorrelation. The response of CO2 to variations in orbital forcing over the past 800,000 years suggests that millennial-scale climate-carbon feedbacks are significantly positive and significantly greater than century-scale feedbacks. Feedbacks are also significantly greater on 100 year timescales than on 50 year timescales over the past 1,500 years. Posterior probability distributions implied by coupled models' predictions and by these paleoclimatic results give a mean of 0.03 for the non-dimensional climate-carbon feedback factor and a 90% chance of its being between -0.04 and 0.09. The 70% chance that climate-carbon feedbacks are positive implies that temperature change projections tend to underestimate an emission path's consequences if they do not allow the carbon cycle to respond to changing temperatures.

The climate impacts of bioenergy systems depend on market and regulatory policy contexts

Lemoine, D.M., R.J. Plevin, A.S. Cohn, A.D. Jones, A.R. Brandt, S.E. Vergara, and D.M. Kammen. 2010. Environmental Science & Technology 44(19):7347-7350. doi:10.1021/es100418p

Biomass can help reduce greenhouse gas (GHG) emissions by displacing petroleum in the transportation sector, by displacing fossil-based electricity, and by sequestering atmospheric carbon. Which use mitigates the most emissions depends on market and regulatory contexts outside the scope of attributional life cycle assessments. We show that bioelectricity's advantage over liquid biofuels depends on the GHG intensity of the electricity displaced. Bioelectricity that displaces coal-fired electricity could reduce GHG emissions, but bioelectricity that displaces wind electricity could increase GHG emissions. The electricity displaced depends upon existing infrastructure and policies affecting the electric grid. These findings demonstrate how model assumptions about whether the vehicle fleet and bioenergy use are fixed or free parameters constrain the policy questions an analysis can inform. Our bioenergy life cycle assessment can inform questions about a bioenergy mandate's optimal allocation between liquid fuels and electricity generation, but questions about the optimal level of bioenergy use require analyses with different assumptions about fixed and free parameters.

Energy Displacement Model (Excel spreadsheet)

Coverage by Green Car Congress (September 30, 2010)

Valuing plug-in hybrid electric vehicles' battery capacity using a real options framework (pdf)

Lemoine, D.M. 2010. The Energy Journal 31(2):113-143.

Plug-in hybrid electric vehicles (PHEVs) enable their drivers to choose whether to use electricity or gasoline, but this fuel flexibility benefit requires the purchase of additional battery capacity relative to most other vehicles. We value the fuel flexibility of PHEVs by representing the purchase of the battery as the purchase of a strip of call options on the price of transportation. We use a Kalman filter to obtain maximum likelihood estimates for three gasoline price models applied to a U.S. municipal market. We find that using a real options approach instead of a discounted cash flow analysis does not raise the retail price at which the battery pays for itself by more than $50/kWh (or by more than 15%). A discounted cash flow approach often provides a good approximation for PHEV value in our application, but real options approaches to valuing PHEVs' battery capacity or role in climate policy may be crucial for other analyses.This article copyrighted and reprinted by permission from the International Association for Energy Economics. The article first appeared in The Energy Journal (Vol. 31, No. 2). Visit The Energy Journal online at http://www.iaee.org/en/publications/journal.aspx

Commentary in USAEE's Dialogue (November 2008)

Coverage by Green Car Congress (April 13, 2010)

Commentary on Sioshansi paper in OR Forum (Feb 2012)

An innovation and policy agenda for commercially competitive plug-in hybrid electric vehicles

Lemoine, D.M., D.M. Kammen, and A.E. Farrell. 2008. Environmental Research Letters 3(1):014003. doi:10.1088/1748-9326/3/1/014003

Plug-in hybrid electric vehicles (PHEVs) can use both grid-supplied electricity and liquid fuels. We show that under recent conditions, millions of PHEVs could have charged economically in California during both peak and off-peak hours even with modest gasoline prices and real-time electricity pricing. Special electricity rate tariffs already in place for electric vehicles could successfully render on-peak charging uneconomical and off-peak charging very attractive. However, unless battery prices fall by at least a factor of two, or gasoline prices double, the present value of fuel savings is smaller than the marginal vehicle costs, likely slowing PHEV market penetration in California. We also find that assumptions about how PHEVs are charged strongly influence the number of PHEVs that can be charged before the electric power system must be expanded. If most PHEVs are charged after the workday, and thus after the time of peak electricity demand, our forecasts suggest that several million PHEVs could be deployed in California without requiring new generation capacity, and we also find that the state's PHEV fleet is unlikely to reach into the millions within the current electricity sector planning cycle. To ensure desirable outcomes, appropriate technologies and incentives for PHEV charging will be needed if PHEV adoption becomes mainstream.

Contributor to A Low-Carbon Fuel Standard for California. Part 1: Technical Analysis (2007)

Commentary on EVs/PHEVs with Dan Kammen in Accenture's Betting on science: Disruptive technologies in transport fuels (2009)

Other Peer-Reviewed Publications

The influence of negative emission technologies and technology policies on the optimal climate mitigation portfolio

Lemoine, D.M., S. Fuss, J. Szolgayova, M. Obersteiner, and D.M. Kammen. 2012. Climatic Change 113(2):141-162. doi:10.1007/s10584-011-0269-4

Working paper version (free)

Reduce growth rate of light-duty vehicle travel to meet 2050 global climate goals

Sager, J., J.S. Apte, D.M. Lemoine, and D.M. Kammen. 2011. Environmental Research Letters 6(2):024018. doi:10.1088/1748-9326/6/2/024018

Addendum to "An innovation and policy agenda for commercially competitive plug-in hybrid electric vehicles"

Lemoine, D.M. and D.M. Kammen. 2009. Environmental Research Letters 4(3):039701. doi:10.1088/1748-9326/4/3/039701

Cost-effectiveness of greenhouse gas emission reductions from plug-in hybrid electric vehicles

Kammen, D.M., S.M. Arons, D.M. Lemoine, and H. Hummel. 2009. In Plug-in Electric Vehicles: What role for Washington?, ed. D.B. Sandalow, 170-191. Washington, D.C.: Brookings Institution Press.

A landscape-level GIS analysis of streamside management zones on the Cumberland Plateau

Lemoine, D., J.P. Evans, and C.K. Smith. 2006. Journal of Forestry 104(3):25-31.