Flexible mandates for investment in new technology

Environmental regulators often seek to promote forefront technology for new investments; however, technology mandates are suspected of raising cost and delaying investment. We examine investment choices under an inflexible (traditional) emissions rate performance standard for new sources. We compare the inflexible standard with a flexible one that imposes an alternative compliance payment (surcharge) for emissions in excess of the standard. A third policy allows the surcharge revenue to fund later retrofits. Analytical results indicate that increasing flexibility leads to earlier introduction of new technology, lower aggregate emissions and higher profits. We test this using multi-stage stochastic optimization for introduction of carbon capture and storage, with uncertain future natural gas and emissions allowance prices. Under perfect foresight, the analytical predictions hold. With uncertainty these predictions hold most often, but we find exceptions. In some cases investments are delayed to enable the decision maker to discover additional information. Copyright Springer Science+Business Media New York 2013