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Tradable credit markets for intensity standards

Ivan Rudik

Economic Modelling, 2018, vol. 72, issue C, 202-215

Abstract: Many environmental standards are expressed in terms of intensity rather than absolute levels. In some cases, intensity standards are associated with tradable credit markets to help reduce firms' compliance costs. I develop a jurisdictional model of credit trading under an intensity standard, framed in terms of a Renewable Portfolio Standard for electric utilities. I find that regulators of firms with low compliance costs always allow for inter-jurisdictional credit trade. Regulators of firms with high costs of compliance allow for credit trade under the condition that extra-jurisdictional credits count less towards compliance compared to credits generated within the jurisdiction. Counter-intuitively, increasing the stringency of the intensity standard when credit trading is possible can have the opposite of the intended effect and actually decrease renewable electricity generation. Using numerical simulations, I show that heterogeneity in terms of renewable costs or externalities across jurisdictions are not sufficient for inter-jurisdictional credit trading to be a stable equilibrium outcome.

Keywords: Energy; Federalism; Intensity standard; Renewable portfolio standards; Pollution; Green preferences (search for similar items in EconPapers)
JEL-codes: H70 Q40 Q48 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Tradable Credit Markets for Intensity Standards (2016) Downloads
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