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Indexed regulation

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Author Info
Newell, Richard G.
Pizer, William A.

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Abstract

Seminal work by Weitzman [Prices vs. quantities, Rev. Econ. Stud. 41 (1974) 477-491] revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.

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Publisher Info
Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 56 (2008)
Issue (Month): 3 (November)
Pages: 221-233
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Handle: RePEc:eee:jeeman:v:56:y:2008:i:3:p:221-233

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Web page: http://www.elsevier.com/locate/inca/622870

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Related research
Keywords: Price Quantity Regulation Uncertainty Policy Environment Climate change;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September. [Downloadable!] (restricted)
  2. Quirion, Philippe, 2005. "Does uncertainty justify intensity emission caps?," Resource and Energy Economics, Elsevier, vol. 27(4), pages 343-353, November. [Downloadable!] (restricted)
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  3. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September. [Downloadable!] (restricted)
  4. Kerr, Suzi & Newell, Richard, 2001. "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Discussion Papers dp-01-14, Resources For the Future. [Downloadable!]
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  5. Neuhoff, K. & von Hirschhausen, C., 2005. "Long-term vs. Short-term Contracts; A European perspective on natural gas," Cambridge Working Papers in Economics 0539, Faculty of Economics, University of Cambridge. [Downloadable!]
  6. Frank Jotzo & John Pezzey, 2007. "Optimal intensity targets for greenhouse gas emissions trading under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 259-284, October. [Downloadable!] (restricted)
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  7. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208. [Downloadable!] (restricted)
  8. Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future. [Downloadable!]
  9. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March. [Downloadable!] (restricted)
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  10. Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-34, June. [Downloadable!] (restricted)
  11. Knut K. Aase, 2004. "A Pricing Model for Quantity Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 617-642. [Downloadable!] (restricted)
  12. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  13. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future. [Downloadable!]
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  14. Frank Jotzo & John C. V. Pezzey, 2006. "Optimal Intensity Targets for Greenhouse Emissions Trading Under Uncertainty," Economics and Environment Network Working Papers 0605, Australian National University, Economics and Environment Network. [Downloadable!]
  15. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future. [Downloadable!]
  16. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ian Mackenzie & Nick Hanley & Tatiana Kornienko, 2008. "The optimal initial allocation of pollution permits: a relative performance approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(3), pages 265-282, March. [Downloadable!] (restricted)
  2. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2009. "A Symmetric Safety Valve," Discussion Papers dp-09-06, Resources For the Future. [Downloadable!]
  3. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Elizabeth Anne Wilman, 2008. "Regulating Greenhouse Gases: Emissions Intensity Limits, A Hybrid Policy, and Offsets," Working Papers 2008-19, Department of Economics, University of Calgary, revised 13 Jan 2008. [Downloadable!]
  5. Richard G. Newell & William A. Pizer, 2008. "Indexed Regulation," NBER Working Papers 13991, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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