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Market-based Emissions Regulation When Damages Vary Across Sources: What Are the Gains from Differentiation?

Meredith Fowlie and Nicholas Muller

No 18801, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Much of the air pollution currently regulated under U.S. emissions trading programs is non-uniformly mixed, meaning that health and environmental damages depend on the location and dispersion characteristics of the sources. Existing policy regimes ignore this fact. Emissions are penalized at a single permit price, regardless of the location of the source. In theory, differentiated policies can be designed to accommodate non-uniformly mixed pollution using emissions penalties that vary with emissions damages. Under perfect certainty, damage-based policy differentiation is unambiguously welfare improving. In the presence of uncertainty about damages and abatement costs, differentiated policies need not welfare dominate simpler, undifferentiated designs. Using rich data from a major U.S. emissions trading program, we estimate the welfare impacts of policy differentiation. Surprisingly, we find that differentiated emissions trading results in welfare loss as compared to the undifferentiated trading regime that was implemented. This result manifests because ex post realized abatement costs appear to have exceeded expectations. We further show that, in this context, a differentiated price-based policy welfare dominates the differentiated quantity-based alternative.

JEL-codes: Q58 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
Note: EEE
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Citations: View citations in EconPapers (20)

Published as Meredith Fowlie & Nicholas Muller, 2019. "Market-Based Emissions Regulation When Damages Vary across Sources: What Are the Gains from Differentiation?," Journal of the Association of Environmental and Resource Economists, vol 6(3), pages 593-632.

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