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Energy Efficiency and Emissions Intensity Standards

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  • Harrison Fell
  • Daniel Kaffine
  • Daniel Steinberg

Abstract

We investigate the role of energy efficiency in rate-based emissions intensity standards, a particularly policy-relevant consideration given that the Environmental Protection Agency’s Clean Power Plan allows crediting of electricity savings as a means of complying with state-specific emissions standards. We show that with perfectly inelastic energy services demand, crediting efficiency measures can recover the first-best allocation. However, when demand for energy services exhibits some elasticity, crediting energy efficiency can no longer recover first-best. While crediting removes the relative distortion between energy generation and energy efficiency, it distorts the absolute level of energy services. Building on these results, we derive the conditions determining the second-best intensity standard and crediting rule. Simulations calibrated to the electricity sector in Texas find that while some form of crediting is generally welfare-improving, the proposed one-for-one crediting of energy savings is unlikely to achieve efficient outcomes.

Suggested Citation

  • Harrison Fell & Daniel Kaffine & Daniel Steinberg, 2017. "Energy Efficiency and Emissions Intensity Standards," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(S1), pages 201-226.
  • Handle: RePEc:ucp:jaerec:doi:10.1086/692015
    DOI: 10.1086/692015
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    References listed on IDEAS

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    1. Palmer, Karen & Paul, Anthony, 2015. "A Primer on Comprehensive Policy Options for States to Comply with the Clean Power Plan," Discussion Papers dp-15-15, Resources For the Future.
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    2. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.

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