The Economics of Energy Infrastructure and Climate Change

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2024

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Avoiding adverse consequences of climate change requires policy, technological, and adaptation solutions. The overall theme of this dissertation is to examine the effectiveness of these solutions by exploring firms' and individuals' responses in the context of energy infrastructure investments and climate change. Chapter 1 discusses the interaction of governments' different policy actions in the energy transition. It provides empirical evidence that natural gas infrastructure expansion shifts consumer choice towards gas-powered systems and increases the cost of residential electrification. Chapter 2 studies the effects of technology upgrades and infrastructure investments in the electricity sector. It shows that enhanced electricity infrastructure can reduce electricity losses, improve service quality, and provide climate benefits. Chapter 3 explores human performance effect of heat adaptation and its implications for estimates of climate change damage. It provides some of the first empirical evidence of the magnitude of human adaptive capacity by documenting acclimatization in collegiate athletes.

In the first chapter, "Bridge or Barrier to Net Zero? Gas Infrastructure Expansion and the Cost of Electrification", I investigate the potential cost of natural gas expansion when electrification is a long-term goal. The expansion of gas infrastructure raises consumer valuation of gas water heaters relative to electric ones, significantly raising the market share and sales quantity of gas water heaters. This implies a higher cost of electrifying water heating when gas infrastructure is expanding, as the goal of electrification is to shift consumers towards electric appliances. Counterfactual simulations suggest that, with a 20% increase in gas infrastructure penetration, the cost of electrification rises from 1.4 to 2.2 billion USD, corresponding to an increase of over 50% relative to the status-quo gas infrastructure scenario. The increased cost of electrification will be weighed against both near-term environmental benefits and other consequences from natural gas expansion. The findings underscore a long-run economic burden of utilizing natural gas as a bridge fuel in the transition towards a net-zero carbon emissions future.

The second chapter, "The Economic and Environmental Effects of Making Electricity Infrastructure Excludable" (co-authored with Husnain Ahmad, Ayesha Ali, Robyn Meeks, and Javed Younas), analyzes the welfare impacts of investments in electricity distribution infrastructure. Electricity theft occurs when individuals cannot be excluded from accessing services. We study the impacts of an infrastructure upgrade in Karachi, Pakistan -- converting bare distribution wires to aerial bundled cables (ABCs) -- that was intended to prevent illegal connections. We find that ABCs reduced unbilled consumption, increasing both the number of formal utility customers and per customer usage. ABC installation also decreased the utility's annual CO2 emissions via reduced electricity generation, providing climate benefits. Resulting changes in consumer surplus vary by consumer type (previously informal versus always formal) and depend on reductions in electricity rationing and the cost of prior illegal grid connections. This study provides evidence on a path to mitigate the financial crises facing utilities in many developing countries.

The third chapter, "Heat Adaptation and Human Performance in a Warming Climate" (co-authored with Steven Sexton and Jamie T. Mullims), improves our understanding of human adaptation to climate change, which is essential for valid damage estimates and thereby, the determination of optimal stringency of mitigation efforts. Labor productivity, human capital formation, and income growth decline amid hot ambient temperatures. The implications of such temperature sensitivity for climate change damages depend upon the capacity for human adaptation to persistent temperature changes---as opposed to idiosyncratic temperature variation. In this paper, we provide some of the first empirical evidence of the magnitude of human adaptive capacity and its implications for estimates of climate change damages by documenting acclimatization in collegiate athletes. Acclimatization is an adaptation to persistent heat exposure, which is common to athletes and non-athletes, old and young. Across varied specifications of the temperature-performance relationship, we find that adaptation reduces performance losses from alternative climate change scenarios by more than 50%.

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Wang, Zhenxuan (2024). The Economics of Energy Infrastructure and Climate Change. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/30925.

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