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Escape from Third-Best: Rating Emissions for Intensity Standards

  • Lemoine, Derek M.

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.

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Paper provided by Agricultural and Applied Economics Association in its series 2014 Allied Social Science Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA with number 161656.

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Date of creation: 30 Sep 2013
Date of revision:
Handle: RePEc:ags:aaeass:161656
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