Study on the behavioral effect of environmental policy on the housing market

There is no current modeling framework or evidence on how environmental policy affects economy-wide behavioral responses with respect to the housing market and land values. Although the micro-level studies reveal insights, their results are challenged by external validity and, by construction, neglect economy-wide interactions. For example, after the implementation of an experiment, how do firms respond to changed household attitudes; how do households respond to firms’ best responses ?

Objectives

Quantify the economy-wide effects of environmental policy (e.g., emissions taxes and energy efficiency standards) on the housing market and land prices.

Context

Current approaches to estimating consumers’ willingness to pay for environmental quality assume that housing prices are invariant to policy interventions. For example, an energy efficiency standard on new houses is likely to affect their values. The housing market is heavily influenced by asset prices—through the interest rate—and environmental policy is guaranteed to affect the value of assets tied towards carbon-intensive inputs.

Approach

We build a dynamic stochastic general equilibrium model whose parameters are calibrated to United States household-level behavior. To solve our model, we use state-of-the-art computational economics techniques.

Expected results

While improved air quality and lower carbon emissions—through environmental policy—will have positive direct effects on house prices (e.g., fewer climatic fluctuations), certain types of environmental policies are more costly than others with respect to the way that they affect firms. For example, we suspect that pure energy standards will lead to higher prices, relative to an emissions cap.