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Escape from Third-Best: Rating Emissions for Intensity Standards

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  • Lemoine, Derek

Abstract

An increasingly common type of environmental policy instrument limits the carbon intensity of transportation and electricity markets. In order to extend the policy's scope beyond point-of-use emissions, regulators assign each competing fuel an emission intensity rating for use in calculating compliance. I show that welfare-maximizing ratings do not generally coincide with the best estimates of actual emissions. In fact, the regulator can achieve a higher level of welfare by manipulating the emission ratings than by manipulating the level of the standard. Moreover, a fuel's optimal rating can actually decrease when its estimated emission intensity increases. Numerical simulations of the California Low-Carbon Fuel Standard suggest that when recent scientific information suggested greater emissions from conventional ethanol, regulators should have lowered ethanol's rating (making it appear less emission-intensive) so that the fuel market would clear with a lower quantity.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2014 Allied Social Science Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA with number 161656.

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Date of creation: 30 Sep 2013
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Handle: RePEc:ags:aaeass:161656

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Keywords: externality; emission; intensity; rating; second-best; Environmental Economics and Policy; H23; Q42; Q58;

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Cited by:
  1. Goulder, Lawrence H. & Hafstead, Marc A.C. & Williams, Roberton C., 2014. "General Equilibrium Impacts of a Federal Clean Energy Standard," Discussion Papers dp-14-02, Resources For the Future.

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