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Setting the Initial Time-Profile of Climate Policy: The Economics of Environmental Policy Phase-Ins

In: The Design and Implementation of U.S. Climate Policy

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  • Roberton C. Williams III

Abstract

This paper considers the question of under what circumstances a new environmental regulation should “phase in” gradually over time, rather than being immediately implemented at full force. The paper focuses particularly on climate policy, though its insights are more general. It shows that while adjustment costs provide a strong efficiency argument for phasing in a quantity-based regulation (or allowing intertemporal flexibility that creates the equivalent of a phase-in), this argument does not apply for price-based regulation. Indeed, in many cases, it will be more efficient to do just the opposite, setting an initially very high emissions price that then falls as the policy phases in. This difference in results comes not from any fundamental difference between price and quantity policies: under either policy, the efficient quantity of abatement rises over time, while the efficient price stays constant or even falls. But other considerations, such as distributional concerns or monitoring and enforcement issues, may still argue for a gradual phase-in even for a price-based policy.

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This chapter was published in:

  • Don Fullerton & Catherine Wolfram, 2012. "The Design and Implementation of U.S. Climate Policy," NBER Books, National Bureau of Economic Research, Inc, number full10-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12144.

    Handle: RePEc:nbr:nberch:12144

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    1. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
    2. Montero, Juan-Pablo, 2000. "Optimal design of a phase-in emissions trading program," Journal of Public Economics, Elsevier, Elsevier, vol. 75(2), pages 273-291, February.
    3. Zodrow, George R., 1985. "Optimal tax reform in the presence of adjustment costs," Journal of Public Economics, Elsevier, Elsevier, vol. 27(2), pages 211-230, July.
    4. Manne, Alan & Richels, Richard, 2004. "The impact of learning-by-doing on the timing and costs of CO2 abatement," Energy Economics, Elsevier, Elsevier, vol. 26(4), pages 603-619, July.
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    Cited by:
    1. Lecuyer, Oskar & Vogt-Schilb, Adrien, 2014. "Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs," Policy Research Working Paper Series 6985, The World Bank.
    2. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2013. "Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?," Resource and Energy Economics, Elsevier, Elsevier, vol. 35(3), pages 217-234.
    3. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Optimal Transition from Coal to Gas and Renewable Power under Capacity Constraints and Adjustment Costs," Post-Print hal-01057241, HAL.
    4. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.

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