Escape from Third-Best: Rating Emissions for Intensity Standards

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

An increasingly common type of environmental policy instrument regulates the carbon intensity of transportation and electricity markets. In order to extend the policy’s scope beyond point-of-use emissions, regulators assign each potential 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 properly selecting the emission ratings than possible by selecting only 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 increased the estimated 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.

Original languageEnglish (US)
Pages (from-to)789-821
Number of pages33
JournalEnvironmental and Resource Economics
Volume67
Issue number4
DOIs
StatePublished - Aug 1 2017

Keywords

  • Emission
  • Ethanol
  • Externality
  • Intensity
  • Rating
  • Second-best

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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