Price Limits in a Tradable Performance Standard

Banban Wang, William Pizer and Clayton Munnings

No 28368, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D82 Q54 Q58 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Published as Banban Wang & William A. Pizer & Clayton Munnings, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, .

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