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Vintage-Differentiated Environmental Regulation

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  • Stavins, Robert

Abstract

Vintage-differentiated regulation (VDR) is a common feature of many environmental and other regulatory policies in the United States. Under VDR, standards for regulated units are fixed in terms of the units’ respective dates of entry, or “vintage,” with later entrants facing more stringent regulation. In the most common application, often referred to as “grandfathering,” units produced prior to a specific date are exempted from new regulation or face less stringent requirements. The vintage-differentiated approach has long appealed to many participants in the policy community, for reasons associated with efficiency, equity, and simple politics. First, it is frequently more cost-effective—in the short-term—to introduce new pollutionabatement technologies at the time that new plants are constructed than to retrofit older facilities with such technologies. Second, it seems more fair to avoid changing the rules of the game in mid-stream, and hence to apply new standards only to new plants. Third, political pressures tend to favor easily-identified existing facilities rather than undefined potential facilities. On the other hand, VDRs can be expected—on the basis of standard investment theory—to retard turnover in the capital stock (of durable plants and equipment), and thereby to reduce the cost-effectiveness of regulation in the long-term, compared with equivalent undifferentiated regulations.1 A further irony is that, when this slower turnover results in delayed adoption of new, cleaner technology, VDR can result in higher levels of pollutant emissions than would occur in the absence of regulation. In this Article, I survey previous applications and synthesize current thinking regarding VDRs in the environmental realm, and develop lessons for public policy and for future research. In Part 2, I describe the ubiquitous nature of VDRs in U.S. regulatory policy, and examine the reasons why VDRs are so common. In Part 3, I establish a theoretical framework for analysis of the cost-effectiveness of alternative types of environmental policy instruments to provide a context for the analysis of VDRs. In Part 4, I focus on the effects of VDRs, and describe a general theory of the impacts of these instruments in terms of their effects on technology adoption, capital turnover, pollution abatement costs, and environmental performance. In Parts 5 and 6, I examine empirical analyses of the impacts of VDRs in two significant sectors: Part 5 focuses on the effects of VDRs in the U.S. auto industry, and Part 6 on the effects of new source review, which is a form of VDR, in power generation and other sectors. In Part 7, I examine implications for policy and research, and recommend avenues for improvements in both.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-05-59.

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Date of creation: 30 Nov 2005
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Handle: RePEc:rff:dpaper:dp-05-59

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Cited by:
  1. Bushnell, James & Wolfram, Catherine, 2010. "Enforcement of Vintage Differentiated Regulations: The Case of New Source Review," Staff General Research Papers 31805, Iowa State University, Department of Economics.
  2. Steven Shavell, 2007. "On Optimal Legal Change, Past Behavior, and Grandfathering," NBER Working Papers 13563, National Bureau of Economic Research, Inc.
  3. Stavins, Robert, 2007. "Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System," Working Paper Series rwp07-053, Harvard University, John F. Kennedy School of Government.
  4. Kruger, Joseph & Oates, Wallace E. & Pizer, William A., 2007. "Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy," Discussion Papers dp-07-02, Resources For the Future.
  5. Burtraw, Dallas & Kruger, Joseph & Zetterberg, Lars & Åhman, Markus, 2005. "The Ten-Year Rule: Allocation of Emission Allowances in the EU Emission Trading System," Discussion Papers dp-05-30, Resources For the Future.

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