Price Limits in a Tradable Performance Standard

William Pizer, Banban Wang and Clayton Munnings

No 21-05, RFF Working Paper Series from Resources for the Future

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 suggest 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 model works out to be 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 (approximately 60% gain) and the California Low Carbon Fuel Standard (approximately 20% gain), to a price mechanism. This finding 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.

Date: 2021-02-18
New Economics Papers: this item is included in nep-des, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Price limits in a tradable performance standard (2022)
Working Paper: Price Limits in a Tradable Performance Standard (2021)
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