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Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form

It is well-known that economic instruments like taxes and tradable permits can improve the efficiency of attaining a target expressed in terms of a single variable, but many energy and environmental regulations are expressed as a ratio of two variables, for instance, as emissions intensity (tons per unit output) or as a renewables requirement (percentage from wind, biomass, etc.). It has been shown previously that conventional formulas for cost-efficiency do not work in this case. This paper shows that even if conventional permit trading is used, the cost-effective implementation is unlikely to be achieved. Alternative rules are presented that permit decentralized market-based implementation of ratio standards to achieve a cost-effective implementation of a ratio standard.

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Energy Specializations: Energy Modeling – Other; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes: Q58: Environmental Economics: Government Policy, D21: Firm Behavior: Theory, Q41: Energy: Demand and Supply; Prices, D22: Firm Behavior: Empirical Analysis, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q42: Alternative Energy Sources

Keywords: Taxes, tradable permits, Cost Efficiency, Regulation, ratio standards, economic instruments

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No4-3

Published in Volume 26, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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