Tradable performance standards in a dynamic context

Jonathon Becker

No 2020-03, Working Papers from Colorado School of Mines, Division of Economics and Business

Abstract: Many sectors of the economy that are targets of emissions reduction policy tend to be subject to price-responsive demand, long-lived capital, capacity constraints, and foresighted decision-making. I explore these features together, in conjunction with a tradable performance standard (TPS). First, I provide a complete characterization of the short-run and steady-state output responses analytically. Second, I validate the intermediate analytical results, explore the dynamics of the transition from pre- to post-policy steady-state, and discuss the welfare implications using a stylized numerical equilibrium model calibrated to a representative electricity sector. I show that the difference in the present value of total social surplus gains between a TPS and a period-over-period damage equivalent cap (CAP) is small relative to total social surplus gains from either policy. Most interestingly, under all but the smallest discount rates, the value of the steady-state perpetuity under the TPS is greater than the CAP.

Keywords: tradable performance standards; output-based rebating; emissions intensity standard; emissions cap; investment; dynamic complementarity problem; electricity (search for similar items in EconPapers)
JEL-codes: C61 H23 Q41 Q48 Q52 Q58 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020-03
New Economics Papers: this item is included in 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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http://econbus-papers.mines.edu/working-papers/wp202003.pdf First version, 2020 (application/pdf)

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Journal Article: Tradable performance standards in a dynamic context (2023)
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