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Tradable performance standards in a dynamic context

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  • Jonathon M. Becker

    (Division of Economics and Business, Colorado School of Mines)

Abstract

Many sectors of the economy that are targets of emissions reduction policy tend to be subject to price-responsive demand, long-lived capital, capacity constraints, and foresighted decision-making. I explore these features together, in conjunction with a tradable performance standard (TPS). First, I provide a complete characterization of the short-run and steady-state output responses analytically. Second, I validate the intermediate analytical results, explore the dynamics of the transition from pre- to post-policy steady-state, and discuss the welfare implications using a stylized numerical equilibrium model calibrated to a representative electricity sector. I show that the difference in the present value of total social surplus gains between a TPS and a period-over-period damage equivalent cap (CAP) is small relative to total social surplus gains from either policy. Most interestingly, under all but the smallest discount rates, the value of the steady-state perpetuity under the TPS is greater than the CAP.

Suggested Citation

  • Jonathon M. Becker, 2020. "Tradable performance standards in a dynamic context," Working Papers 2020-03, Colorado School of Mines, Division of Economics and Business.
  • Handle: RePEc:mns:wpaper:wp202003
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    File URL: http://econbus-papers.mines.edu/working-papers/wp202003.pdf
    File Function: First version, 2020
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    References listed on IDEAS

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    Cited by:

    1. Becker, Jonathon M., 2021. "General equilibrium impacts on the U.S. economy of a disruption to Chinese cobalt supply," Resources Policy, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    tradable performance standards; output-based rebating; emissions intensity standard; emissions cap; investment; dynamic complementarity problem; electricity;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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