Working Paper: NBER ID: w28368
Authors: Banban Wang; William A. Pizer; Clayton Munnings
Abstract: Tradable performance standards are widely used sectoral regulatory policies. Examples include the US lead phasedown, fuel economy standards for automobiles, renewable portfolio standards, low carbon fuel standards, and—most recently—China’s new national carbon market. At the same time, theory and experience with traditional cap-and-trade programs suggests an important role for price limits in the form of floors, ceilings, and reserves. In this paper we develop a simple analytical model to derive the welfare comparison between tradable performance standards and a price-based alternative. This works out to be is a simple variant of the traditional Weitzman prices-versus-quantities result. We use this result to show that substantial gains could arise from shifting two programs, China’s new national carbon market (~60% gain) and the California Low Carbon Fuel Standard (~20% gain), to a price mechanism. This will generally be true when the coefficient of variation in the price under a TPS is larger than 50%. We end with a discussion of implementation issues, including full and partial consignment auctions based on actual and expected output.
Keywords: tradable performance standards; price limits; welfare comparison; carbon market
JEL Codes: D82; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tradable performance standards (TPS) (F13) | welfare losses (D69) |
| price-based mechanisms (D47) | welfare gains (D69) |
| coefficient of variation in emissions rates > 50% (Q52) | welfare losses from TPS (H53) |
| price volatility under TPS (G13) | welfare gains from feebates (D61) |
| price limits in TPS (P22) | mitigate compliance costs (Q52) |
| price limits in TPS (P22) | improve regulatory effectiveness (L51) |