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Regulating Greenhouse Gases: Emissions Intensity Limits, A Hybrid Policy, and Offsets

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Author Info
Elizabeth Anne Wilman

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Abstract

Emissions intensity caps, which have gained popularity for regulating greenhouse gas emissions, limit emissions as a proportion of output. The objective is to index allowed emissions to output, avoiding a higher than expected marginal abatement cost when output is expanding. In aggregate, it is possible to set an emissions intensity cap and translate it into an absolute cap for the purpose of emissions trading. However, individual intensity limits are also used, and are part of some emission trading programs. Without the restrictive assumption that output is unresponsive to changes in price or cost, it is not possible to set individual intensity limits that will achieve economic efficiency. This inefficiency also compromises the welfare gains achievable through true cost saving abatement options, such as cheap offsets. A hybrid price-quantity regulation can better promote economic efficiency, while preserving the political appeal of a permit system with gratis initial allocation. It can also avoid a high marginal abatement cost without conceding the gains achievable through cheaper abatement technologies. Nevertheless, individual intensity caps can be part of a piecemeal approach to economic efficiency. If conditionally efficient intensity caps are already in place, the transition to a hybrid system is relatively straightforward.

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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2008-19.

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Date of creation: 13 Jan 2008
Date of revision: 13 Jan 2008
Handle: RePEc:clg:wpaper:2008-19

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Find related papers by JEL classification:
Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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  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. Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future. [Downloadable!]
  3. 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)
  4. Adar, Zvi & Griffin, James M., 1976. "Uncertainty and the choice of pollution control instruments," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 178-188, October. [Downloadable!] (restricted)
  5. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring. [Downloadable!] (restricted)
  6. A. Lans Bovenberg & Lawrence H. Goulder & Derek J. Gurney, 2005. "Efficiency Costs of Meeting Industry-Distributional Constraints Under Environmental Permits and Taxes," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 950-970, Winter.
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  7. Neil J. Buckley, R. Andrew Muller, and Stuart Mestelman, 2005. "Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity," Department of Economics Working Papers 2005-03, McMaster University. [Downloadable!]
  8. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future. [Downloadable!]
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  9. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future. [Downloadable!]
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