Escape from Third-Best: Rating Emissions for Intensity Standards

University of Arizona Department of Economics Working Paper No. 12-03

43 Pages Posted: 14 Apr 2012 Last revised: 22 Apr 2016

See all articles by Derek Lemoine

Derek Lemoine

University of Arizona - Department of Economics

Date Written: December 28, 2013

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 competing 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.

A revised version has been published in Environmental and Resource Economics (2016).

Keywords: externality, emission, intensity, rating, second-best, ethanol

JEL Classification: H23, Q42, Q58

Suggested Citation

Lemoine, Derek, Escape from Third-Best: Rating Emissions for Intensity Standards (December 28, 2013). University of Arizona Department of Economics Working Paper No. 12-03. Available at SSRN: https://ssrn.com/abstract=2039550 or http://dx.doi.org/10.2139/ssrn.2039550

Derek Lemoine (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.dereklemoine.com/

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