Indexed Regulation
39 Pages Posted: 16 May 2008 Last revised: 25 Sep 2022
Date Written: May 2008
Abstract
Seminal work by Weitzman (1974) revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A U.S. Cap-and-Trade System to Address Global Climate Change
-
A Meaningful U.S. Cap-and-Trade System to Address Climate Change
-
Compensation Rules for Climate Policy in the Electricity Sector
By Dallas Burtraw and Karen L. Palmer
-
Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy
By Joseph A. Kruger, Wallace E. Oates, ...
-
Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System
-
Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System
-
Land-Use Change and Carbon Sinks: Econometric Estimation of the Carbon Sequestration Supply Function
By Andrew Plantinga, Ruben N. Lubowski, ...
-
Linkage of Tradable Permit Systems in International Climate Policy Architecture
By Judson L. Jaffe and Robert N. Stavins