Vintage-Differentiated Environmental Regulation

Abstract

Vintage-differentiated regulation (VDR) is a common feature of many environmental and other regulatory policies, wherein standards for regulated units are fixed in terms of the units' respective dates of entry, with later entrants facing more stringent regulation. In the most common application, often referred to as grandfathering, units produced prior to a specific date are exempted from new regulation or face less stringent requirements. The vintage-differentiated approach appeals to many in the policy community, for reasons associated with efficiency, equity, and simple politics. First, it is frequently more cost-effective - in the short-term - to introduce new pollution-abatement technologies at the time that new plants are constructed than to retrofit older facilities. Second, it seems more fair to avoid changing the rules of the game in mid-stream, and hence to apply new standards only to new plants. Third, political pressures tend to favor easily-identified existing facilities rather than undefined potential facilities. On the other hand, VDRs can be expected - on the basis of standard investment theory - to retard turnover in the capital stock (of durable plants and equipment), and thereby to reduce the cost-effectiveness of regulation in the long-term, compared with equivalent undifferentiated regulations. A further irony is that when this slower turnover results in delayed adoption of new, cleaner technology, VDR can result in higher levels of pollutant emissions than would occur in the absence of regulation. In this paper, I survey previous applications and synthesize current thinking regarding VDRs in the environmental realm, and develop lessons for public policy and future research. I describe the ubiquitous nature of VDRs in U.S. regulatory policy; examine the reasons why VDRs are so common; establish a theoretical framework for analysis of the cost-effectiveness of alternative types of environmental policy instruments to provide a context for the analysis of VDRs; describe a general theory of the impacts of VDRs in terms of their effects on technology adoption, capital turnover, pollution abatement costs, and environmental performance; examine empirical analyses of the impacts of VDRs in two significant sectors - the U.S. auto industry and new source review in power generation and other sectors; and examine implications for policy and research.

Keywords: vintage-differentiated regulation, new source review, cost-effective environmental regulation

JEL Classification: Q58, Q55, Q52, Q53, L51