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Escape from Third-Best: Rating Emissions for Intensity Standards

Derek Lemoine

Environmental & Resource Economics, 2017, vol. 67, issue 4, 789-821

Abstract: 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.

Keywords: Externality; Emission; Intensity; Rating; Second-best; Ethanol (search for similar items in EconPapers)
JEL-codes: H23 Q42 Q58 (search for similar items in EconPapers)
Date: 2017
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