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Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form

Ross McKitrick

Year: 2005
Volume: Volume 26
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No4-3
View Abstract

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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