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Climate Economics Seminar: Escape from Third-Best: Rating Emissions for Intensity Standards
May 6, 2014, 2 - 3:30 PM
Room 4128, William Jefferson Clinton West Building, 1301 Constitution Ave., NW, Washington, DC
Derek Lemoine (Department of Economics, University of Arizona)
EPA Contact: Carl Pasurka, 202-566-2275
Abstract: An increasingly common type of environmental policy instrument regulates the carbon intensity of transportation and electricity markets. In order to extend the policy's scope beyond point-of-use emissions, regulators assign each competing fuel an emission intensity rating for use in calculating compliance. I show that welfare-maximizing ratings do not generally coincide with the best estimates of actual emissions. In fact, the regulator can achieve a higher level of welfare by properly selecting the emission ratings than possible by selecting only the level of the standard. Moreover, a fuel's optimal rating can actually decrease when its estimated emission intensity increases. Numerical simulations of the California Low-Carbon Fuel Standard suggest that when recent scientific information increased the estimated emissions from conventional ethanol, regulators should have lowered ethanol's rating (making it appear less emission-intensive) so that the fuel market would clear with a lower quantity.