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Price Limits in a Tradable Performance Standard

Author

Listed:
  • Banban Wang
  • William A. Pizer
  • Clayton Munnings

Abstract

Tradable performance standards are widely used sectoral regulatory policies. Examples include the US lead phasedown, fuel economy standards for automobiles, renewable portfolio standards, low carbon fuel standards, and—most recently—China’s new national carbon market. At the same time, theory and experience with traditional cap-and-trade programs suggests an important role for price limits in the form of floors, ceilings, and reserves. In this paper we develop a simple analytical model to derive the welfare comparison between tradable performance standards and a price-based alternative. This works out to be is a simple variant of the traditional Weitzman prices-versus-quantities result. We use this result to show that substantial gains could arise from shifting two programs, China’s new national carbon market (~60% gain) and the California Low Carbon Fuel Standard (~20% gain), to a price mechanism. This will generally be true when the coefficient of variation in the price under a TPS is larger than 50%. We end with a discussion of implementation issues, including full and partial consignment auctions based on actual and expected output.

Suggested Citation

  • Banban Wang & William A. Pizer & Clayton Munnings, 2021. "Price Limits in a Tradable Performance Standard," NBER Working Papers 28368, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28368
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    Cited by:

    1. Xin-gang, Zhao & Yi, Zuo & Hui, Wang & Zhen, Wang, 2022. "How can the cost and effectiveness of renewable portfolio standards be coordinated? Incentive mechanism design from the coevolution perspective," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
    2. Wu, Libo & Zhang, Shuaishuai & Qian, Haoqi, 2022. "Distributional effects of China's National Emissions Trading Scheme with an emphasis on sectoral coverage and revenue recycling," Energy Economics, Elsevier, vol. 105(C).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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