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Indexed Regulation

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Author Info
Newell, Richard G. () (Resources for the Future)
Pizer, William A. () (Resources for the Future)

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Abstract

Seminal work by Weitzman (1974) revealed that prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables’ coefficients of variation divided by their correlation is less than two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to the case of climate change, we find that quantities indexed to GDP are preferred to fixed quantities for about half of the 19 largest emitters, including the United States and China, while (consistent with previous work) prices dominate for all countries.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-06-32.

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Date of creation: 20 Jun 2006
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Handle: RePEc:rff:dpaper:dp-06-32

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Related research
Keywords: price; quantity; regulation; uncertainty; policy; environment; climate change;

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Find related papers by JEL classification:
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frank Jotzo & John Pezzey, 2007. "Optimal intensity targets for greenhouse gas emissions trading under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 259-284, October. [Downloadable!] (restricted)
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  2. Knut K. Aase, 2004. "A Pricing Model for Quantity Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 617-642. [Downloadable!] (restricted)
  3. Philippe Quirion, 2005. "Does uncertainty justify intensity emission caps?," Post-Print halshs-00007162_v1, HAL. [Downloadable!]
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  4. Frank Jotzo & John C. V. Pezzey, 2006. "Optimal Intensity Targets for Greenhouse Emissions Trading Under Uncertainty," Economics and Environment Network Working Papers 0605, Australian National University, Economics and Environment Network. [Downloadable!]
  5. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future. [Downloadable!]
  6. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March. [Downloadable!] (restricted)
  7. 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)
  8. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September. [Downloadable!] (restricted)
  9. Kerr, Suzi & Newell, Richard, 2001. "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Discussion Papers dp-01-14, Resources For the Future. [Downloadable!]
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  10. Neuhoff, K. & von Hirschhausen, C., 2005. "Long-term vs. Short-term Contracts; A European perspective on natural gas," Cambridge Working Papers in Economics 0539, Faculty of Economics, University of Cambridge. [Downloadable!]
  11. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208. [Downloadable!] (restricted)
  12. Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future. [Downloadable!]
  13. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March. [Downloadable!] (restricted)
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  14. 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)
  15. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  16. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future. [Downloadable!]
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ian Mackenzie & Nick Hanley & Tatiana Kornienko, 2008. "The optimal initial allocation of pollution permits: a relative performance approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(3), pages 265-282, March. [Downloadable!] (restricted)
  2. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2009. "A Symmetric Safety Valve," Discussion Papers dp-09-06, Resources For the Future. [Downloadable!]
  3. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Elizabeth Anne Wilman, 2008. "Regulating Greenhouse Gases: Emissions Intensity Limits, A Hybrid Policy, and Offsets," Working Papers 2008-19, Department of Economics, University of Calgary, revised 13 Jan 2008. [Downloadable!]
  5. Richard G. Newell & William A. Pizer, 2008. "Indexed Regulation," NBER Working Papers 13991, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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