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Flexible Mandates for Investment in New Technology

Author

Listed:
  • Patino Echeverri, Dalia
  • Burtraw, Dallas

    () (Resources for the Future)

  • Palmer, Karen

    () (Resources for the Future)

Abstract

Regulators often seek to promote the use of improved, cleaner technology when new investments occur; however, technology mandates are suspected of raising costs and delaying investment. We examine investment choices for electricity generation under a strict emissions rate performance standard requiring the installation of carbon capture and storage (CCS) on fossil-fired plants. We compare the strict standard with a flexible one that imposes a surcharge for emissions in excess of the standard. A third policy allows the surcharge revenue to fund later CCS retrofits. Analytical results indicate that increasing flexibility leads to earlier introduction of CCS, lower aggregate emissions and higher profits. We test this using multi-stage stochastic optimization, with uncertain future natural gas and emissions allowance prices. Under perfect foresight, the analytical predictions hold. With uncertainty, these predictions hold most often but we find outcomes that contradict the theory. In some cases, investments are delayed to enable the decisionmaker to learn additional information.

Suggested Citation

  • Patino Echeverri, Dalia & Burtraw, Dallas & Palmer, Karen, 2012. "Flexible Mandates for Investment in New Technology," Discussion Papers dp-12-14, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-12-14
    as

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-12-14.pdf
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    References listed on IDEAS

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    1. List John A. & Millimet Daniel L & McHone Warren, 2004. "The Unintended Disincentive in the Clean Air Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(2), pages 1-28, February.
    2. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
    3. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
    4. Sekar, Ram C. & Parsons, John E. & Herzog, Howard J. & Jacoby, Henry D., 2007. "Future carbon regulations and current investments in alternative coal-fired power plant technologies," Energy Policy, Elsevier, vol. 35(2), pages 1064-1074, February.
    5. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    technology standards; innovation; climate change; uncertainty; carbon capture and storage;

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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