Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2

Bushnell, James; Chen, Yihsu

doi:10.3386/w15495

Cited by 22 publications

(18 citation statements)

References 33 publications

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“…There is no national RPS, but currently 24 states plus the District of Columbia have RPSs requiring from 15% to 40% renewable power by various dates. 8 There is substantial variation in the policies across states. Most variation arises in the definition of renewable, perhaps due to the ambiguity of the externality associated with nonrenewable electricity.…”

Section: Intensity Standards In Environmental Regulationmentioning

confidence: 98%

Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation

Holland

2012

Journal of Environmental Economics and Management

137

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a b s t r a c tThe best emissions tax or emissions cap may be an inferior instrument under incomplete regulation (leakage). Without leakage, an intensity standard (regulating emissions per unit of output) is inferior due to an implicit output subsidy. This inefficiency can be eliminated by an additional consumption tax. With leakage, an intensity standard can dominate the optimal emissions tax, since the implicit output subsidy prevents leakage. The addition of a consumption tax improves an intensity standard's efficiency, may prevent leakage, and may be efficient. Comparing intensity standards to output-based updating shows that the latter dominates if updating is sufficiently flexible.

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Section: Intensity Standards In Environmental Regulationmentioning

confidence: 98%

Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation

Holland

2012

Journal of Environmental Economics and Management

137

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“…This compensating variation is defined as the 26 Setting an aggregate cap on emissions as a function of aggregate output differs from allocating permits across firms based on firm-level output. The latter, output-based allocation schemes, can create distortions (Bushnell and Chen 2009), mitigate pre-existing distortions (Fischer and Fox 2007), or affect distributional outcomes (Fullerton and Heutel 2010). 27 Because I do not have to linearize the objective function in these simulations, I avoid the "pitfalls" of welfare analysis identified in Kim and Kim (2007 29 As mentioned in the introduction, although small as a fraction of total GDP, these net benefits are likely to be nonuniformly distributed across the economy, such that for some households (especially the poorest) and some firms (especially electric utilities) the cost savings from the optimal policy are quite substantial.…”

Section: Base Case Simulationmentioning

confidence: 99%

How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks

Heutel

2012

Review of Economic Dynamics

356

292

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How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions.However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.JEL codes: Q58, E32, Q54 Keywords: Climate change; Environmental policy I would like to thank Don Fullerton, Bill Hogan, Stephen Holland, John Horowitz, Bidisha Lahiri, Billy Pizer, Rob Stavins, Dan Tortorice, Richard Zeckhauser, two anonymous referees, and various seminar participants for helpful comments, and the Kernan Brothers fellowship at the Harvard University Center for the Environment for funding. 3Business cycles can substantially affect an economy, and many policies recognize economic fluctuations and are designed to adapt to them. For example, unemployment insurance is designed to have a stabilizing countercyclical effect since payments increase with unemployment. Environmental policy, though, typically has not been designed to respond to business cycles, likely because the scale of most environmental policies is small relative to the economy. However, addressing global climate change will require policies that dwarf conventional environmental policies in scale and scope. Can climate policy designers continue to ignore business cycles, or does climate policy require a more explicit integration with macroeconomic fluctuations? This paper investigates how environmental policy optimally responds to business cycles.I develop a dynamic stochastic general equilibrium model with persistent productivity shocks and with pollution as a stock variable that negatively affects the economy. The model is calibrated to the US economy and to damages from carbon dioxide, the leading greenhouse gas.I numerically solve for the dynamic optimal response of policy to shocks. A welfare analysis compares the dynamic policy that optimally adapts to productivity shocks to the best static policy that holds emissions constant at its long-run optimal value but ignores shocks. I also model a decentralized economy, where firms and consumers optimize in response to a government policy of pollution taxes or quantity constraints, potentially under information asymmetry.This analysis hi...

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“…The author finds that an LCFS may be more efficient than a carbon 27 Leakage is a broader problem associated with any regional carbon policy. The issue has been studied in depth the context of other carbon policies like cap-and-trade (Bushnell et al, 2008;Fowlie, 2009;Bushnell and Chen, 2012;Fischer and Fox, 2012).…”

Section: Incomplete Regulation Leakage and Market Powermentioning

confidence: 99%

The design and economics of low carbon fuel standards

Lade

Lawell

2015

Research in Transportation Economics

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Low carbon fuel standards (LCFS) are increasingly common policy tools used to decrease emissions and increase the penetration of renewable energy technologies in the transportation sector. In this paper, we discuss important design elements of the policy, and provide a background on prominent policies that are currently enacted or proposed. The economics of an LCFS are presented using a simple conceptual model, and the economic literature on the policy is reviewed. Important opportunities to build on the extant literature are identified, including studying the role of low carbon fuel standards in spurring technical change, and the interaction of the policy with other federal and state transportation policies. AbstractLow-carbon fuel standards (LCFS) are increasingly common policy tools used to decrease emissions and increase the penetration of renewable energy technologies in the transportation sector. In this paper, we discuss important design elements of the policy, and provide a background on prominent policies that are currently enacted or proposed. The economics of an LCFS are presented using a simple conceptual model, and the economic literature on the policy is reviewed. Important opportunities to build on the extant literature are identified, including studying the role of low carbon fuel standards in spurring technical change, and the interaction of the policy with other federal and state transportation policies.JEL Codes: H23; Q40; Q50

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Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2

Cited by 22 publications

References 33 publications

Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation

Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation

How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks

The design and economics of low carbon fuel standards

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