Dissertation Defense: “Essays in Environmental Macroeconomics”, Yang Gao, University of California, Santa Barbara

Speaker

Yang Gao, University of California, Santa Barbara

Biography

Yang’s main research interests lie in Macroeconomics and Environmental Economics. She studies the macroeconomic and welfare implications of climate change and climate policies, with an emphasis on the roles of firm dynamics and market frictions. Her current research examines how climate policies interact with production-side distortions and frictions, aiming to uncover their true efficiency, distributional, and aggregate impacts over the short- and long-run horizons. Methodologically, her work combines econometric analysis of micro- and macro-level data with theoretical investigations and quantitative macroeconomic modeling. Prior to attending UC Santa Barbara, Yang was awarded a Bachelor’s Degree in Economics from Renmin University of China.

Title

"Essays in Environmental Macroeconomics”

Abstract

This dissertation investigates the macroeconomic and welfare implications of climate change and climate policies, with particular emphasis on firm dynamics and market frictions. The three chapters approach these questions using a combination of quantitative macroeconomic modeling, theoretical analysis, and econometric evidence from micro-and macro-level data.

The first chapter studies optimal carbon taxation when capital is misallocated across firms. Using data on U.S. public firms, I document that firm-level revenue-based emissions intensity is negatively correlated with the return to capital, indicating that capital is misallocated toward dirty firms. Embedding this pattern into a misallocation framework, I demonstrate a reallocation mechanism: a carbon tax can reduce resource misallocation and boost aggregate productivity by reallocating capital from dirty to clean firms. I develop a dynamic, general-equilibrium climate-economy model with heterogeneous firms and tangibility-dependent financial frictions: dirty firms hold more tangible assets and face looser collateral constraints, attracting excess capital. Calibrated to firm-level balance sheet and emissions data, the model implies that a carbon tax raises aggregate productivity over a wide range of tax rates. The allocative efficiency gains generate welfare improvements beyond those from internalizing emissions, increasing the optimal carbon tax by 75% relative to a benchmark without pre-existing misallocation. Consistent with the same mechanism, removing financial frictions to equalize returns further reduces economy-wide emissions intensity.

The second chapter, coauthored with Gregory Casey and Peter K. Kruse-Andersen, studies the effectiveness of climate change mitigation policies in reducing carbon emissions, focusing on the channel of economy-wide energy efficiency. Using U.S. data, we estimate an impulse response function (IRF) that characterizes how energy efficiency responds to energy price shocks. Standard climate-economy models cannot replicate the slow transition dynamics observed in the data. We build a tractable model that nests the existing literature and can closely replicate the empirical IRF. The slow dynamics in our model imply that carbon taxes reduce short-run and cumulative emissions less than predicted by standard models. The slow dynamics also imply that higher carbon taxes and greater reductions in output are needed to achieve a given environmental target.

The third chapter, coauthored with Gregory Casey and Peter K. Kruse-Andersen, further examines the aggregate substitution possibilities between fossil ("dirty") and non-fossil ("clean") sources of energy, a central building block of macroeconomic climate-economy models. These substitution possibilities are often captured by a single parameter: the aggregate elasticity of substitution between clean and dirty energy. We bound the elasticity using two objects: the real price of fossil fuels and the fossil fuel share of energy expenditure. Descriptive evidence and empirical impulse response functions suggest that the long-run elasticity of substitution between clean and dirty energy is close to one and the short-run elasticity is well below one. Together, these results imply that existing climate-economy models significantly overstate the ability of climate policies to reduce carbon emissions.

JEL Codes: E22, E24, G32, H23, O33, O44, O47, Q43, Q54, Q58

Event Details

Join us for Yang’s dissertation defense, where she will present her research titled “Essays in Environmental
Macroeconomics.” We invite you to attend this important academic milestone and learn more about her work in the
field. To access a copy of the dissertation here, you must have an active UCSB NetID and password.