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Price limits in a tradable performance standard

Publication ,  Journal Article
Wang, B; Pizer, WA; Munnings, C
Published in: Journal of Environmental Economics and Management
October 1, 2022

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 suggest 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 model works out to be a simple variant of the traditional Weitzman prices-versus-quantities result. We use this result to show that substantial gains—perhaps 50% or more when prices are low—could arise from shifting two programs, China's new national carbon market and the California Low Carbon Fuel Standard, to a price mechanism. This finding will generally be true when the coefficient of variation in the price under a TPS is larger than 50%. We end with a brief discussion of implementation issues, including consignment auctions.

Duke Scholars

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Published In

Journal of Environmental Economics and Management

DOI

EISSN

1096-0449

ISSN

0095-0696

Publication Date

October 1, 2022

Volume

116

Related Subject Headings

  • Agricultural Economics & Policy
  • 3801 Applied economics
  • 1402 Applied Economics
  • 1401 Economic Theory
  • 0502 Environmental Science and Management
 

Citation

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Wang, B., Pizer, W. A., & Munnings, C. (2022). Price limits in a tradable performance standard. Journal of Environmental Economics and Management, 116. https://doi.org/10.1016/j.jeem.2022.102742
Wang, B., W. A. Pizer, and C. Munnings. “Price limits in a tradable performance standard.” Journal of Environmental Economics and Management 116 (October 1, 2022). https://doi.org/10.1016/j.jeem.2022.102742.
Wang B, Pizer WA, Munnings C. Price limits in a tradable performance standard. Journal of Environmental Economics and Management. 2022 Oct 1;116.
Wang, B., et al. “Price limits in a tradable performance standard.” Journal of Environmental Economics and Management, vol. 116, Oct. 2022. Scopus, doi:10.1016/j.jeem.2022.102742.
Wang B, Pizer WA, Munnings C. Price limits in a tradable performance standard. Journal of Environmental Economics and Management. 2022 Oct 1;116.
Journal cover image

Published In

Journal of Environmental Economics and Management

DOI

EISSN

1096-0449

ISSN

0095-0696

Publication Date

October 1, 2022

Volume

116

Related Subject Headings

  • Agricultural Economics & Policy
  • 3801 Applied economics
  • 1402 Applied Economics
  • 1401 Economic Theory
  • 0502 Environmental Science and Management