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Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage

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  • Fowlie, Meredith

Abstract

For political, jurisdictional and technical reasons, environmental regulation of industrial pollution is often incomplete: regulations apply to only a subset of facilities contributing to a pollution problem. Policymakers are increasingly concerned about the emissions leakage that may occur if unregulated production can be easily substituted for production at regulated firms. This paper analyzes emissions leakage in an incompletely regulated and imperfectly competitive industry. When regulated producers are less polluting than their unregulated counterparts, emissions under incomplete regulation exceed the level of emissions that would have occurred under complete regulation. The reverse can be true when regulated firms are relatively dirty. In a straightforward application of the theory of the second best, I show that incomplete regulation can welfare dominate complete regulation of emissions from an asymmetric oligopoly. The model is used to simulate greenhouse gas emissions from California’s electricity sector under a source-based cap-and-trade program. Incomplete regulation that exempts out-of-state producers achieves approximately a third of the emissions reductions achieved under complete regulation at almost three times the cost per ton of emissions abated.

Suggested Citation

  • Fowlie, Meredith, 2007. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0hw645zk, Department of Agricultural & Resource Economics, UC Berkeley.
  • Handle: RePEc:cdl:agrebk:qt0hw645zk
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    Cited by:

    1. Palmer, Karen & Burtraw, Dallas & Paul, Anthony, 2009. "Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California," Discussion Papers dp-09-41, Resources For the Future.
    2. Dallas Burtraw, 2008. "Regulating CO 2 in electricity markets: sources or consumers?," Climate Policy, Taylor & Francis Journals, vol. 8(6), pages 588-606, November.
    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.
    4. Oren Ahoobim & Nick Burger & Charles Kolstad & Shaun McRae & Corbett Grainger, 2008. "Beyond the Market Advisory Committee: Proceedings from a Workshop Held at Stanford University," Discussion Papers 07-045, Stanford Institute for Economic Policy Research.

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