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Escape from Third-Best: Rating Emissions for Intensity Standards

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  • Lemoine, Derek M.

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.

Suggested Citation

  • Lemoine, Derek M., 2013. "Escape from Third-Best: Rating Emissions for Intensity Standards," 2014 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA 161656, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaeass:161656
    DOI: 10.22004/ag.econ.161656
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    Cited by:

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    2. Lade, Gabriel E. & Lin Lawell, C.-Y. Cynthia, 2015. "The design and economics of low carbon fuel standards," Research in Transportation Economics, Elsevier, vol. 52(C), pages 91-99.
    3. Lawrence H. Goulder & Marc A. C. Hafstead & Roberton C. Williams III, 2016. "General Equilibrium Impacts of a Federal Clean Energy Standard," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 186-218, May.
    4. Rudik, Ivan, 2018. "Tradable credit markets for intensity standards," Economic Modelling, Elsevier, vol. 72(C), pages 202-215.
    5. 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.
    6. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    7. Bielen, David A., 2018. "Do differentiated performance standards help coal? CO2 policy in the U.S. electricity sector," Resource and Energy Economics, Elsevier, vol. 53(C), pages 79-100.
    8. Lade, Gabriel & Lin, C.-Y. Cynthia & Smith, Aaron, 2014. "Policy Uncertainty under Market-Based Regulations: Evidence from the Renewable Fuel Standard," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170673, Agricultural and Applied Economics Association.
    9. Lade, Gabriel E & Lawell, C-Y Cynthia Lin, 2015. "Mandating green: On the Design of Renewable Fuel Policies and Cost Containment Mechanisms," Institute of Transportation Studies, Working Paper Series qt5zj382t4, Institute of Transportation Studies, UC Davis.

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    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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