Working Paper: NBER ID: w18801
Authors: Meredith Fowlie; Nicholas Muller
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.
Keywords: No keywords provided
JEL Codes: Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differentiated emissions trading (Q58) | welfare loss (D69) |
| ex post realized abatement costs > expectations (Q52) | welfare loss (D69) |
| differentiated price-based policy (L11) | welfare dominates differentiated quantity-based alternative (D69) |
| variation in damages and characteristics of marginal abatement cost functions (D61) | welfare implications of policy differentiation (H53) |
| uncertainty about damages and costs (K13) | ambiguous welfare implications (D69) |
| differentiated policies (J18) | expected benefits (D61) |