Flexible mandates for investment in new technology
- First Online:
- 260 Downloads
Environmental regulators often seek to promote forefront technology for new investments; however, technology mandates are suspected of raising cost and delaying investment. We examine investment choices under an inflexible (traditional) emissions rate performance standard for new sources. We compare the inflexible standard with a flexible one that imposes an alternative compliance payment (surcharge) for emissions in excess of the standard. A third policy allows the surcharge revenue to fund later retrofits. Analytical results indicate that increasing flexibility leads to earlier introduction of new technology, lower aggregate emissions and higher profits. We test this using multi-stage stochastic optimization for introduction of carbon capture and storage, with uncertain future natural gas and emissions allowance prices. Under perfect foresight, the analytical predictions hold. With uncertainty these predictions hold most often, but we find exceptions. In some cases investments are delayed to enable the decision maker to discover additional information.
KeywordsTechnology standards Climate change Uncertainty Carbon capture and storage
JEL ClassificationQ52 Q55 Q58
- Al-Juaied, M., Whitmore, A. (2009). Realistic costs of carbon capture. Discussion Paper 2009–2008. Cambridge, MA: Energy Technology Innovation Research Group, Belfer Center for Science and International Affairs, Harvard Kennedy School.Google Scholar
- Bannon, B., DeBell, M., Krosnick, J.A., Kopp, R., Aldhous, P. (June 2007). Americans’ Evaluations of Policies to Reduce Greenhouse Gas Emissions. http://woods.stanford.edu/docs/surveys/GW_New_Scientist_Poll_Technical_Report.pdf. Accessed 21 Sep 2010.
- Baumol, W. J., & Oates, W. E. (1988). The theory of environmental policy. Cambridge, UK: Cambridge University Press.Google Scholar
- Bergerson, J. & Lave, L. (2007). Baseload coal investment decisions under uncertain carbon legislation. Environmental Science and Technology, 41(10), 3431–3436.Google Scholar
- Bushnell, J., & Wolfram, C. (2006). The economic effects of vintage differentiated regulation: The case of new source review, University of California Energy Institute. Center for the Study of Energy Markets Working Paper, 157(July).Google Scholar
- Carnegie Mellon University (2010). Integrated Environmental Control Model-CS, version 5.2.1. http://www.cmu.edu/epp/iecm/about.html.
- Dixit, A. K., & Pindyck, R. S. (1994). Investment under Uncertainty. Princeton, NJ: Princeton University Press.Google Scholar
- DSIRE (2012). Database of State Incentives for Renewable & Efficiency. www.dsireusa.org. Accessed 31 Nov 2012.
- Energy Information Administration (EIA). (2010). Annual Energy Outlook 2010, DOE/EIA-0383(2010), May.Google Scholar
- Energy Information Administration (EIA). (2007a). Annual Energy Outlook 2008 (Early Release), DOE/EIA-0383(2008).Google Scholar
- Energy Information Administration (EIA). (2007b). Energy Market and Economic Impacts of S. 280, the climate Stewardship and Innovation Act of 2007. SR/OIAF/2007-04. Washington, DC: U.S. EIA.Google Scholar
- Fischer, C., Parry, I. W. H., & Pizer, W. A. (2003). Instrument choice for environmental protection when technological innovation is endogenous. Journal of Environmental Economics and Management, 45(3), 523–545.Google Scholar
- Gruenspecht, H. K. (1982). Differentiated regulation: The case of auto emissions standards. American Economic Review, 72(2), 329–332.Google Scholar
- List J. A., Millimet, D. L., McHone, W. (2004). The unintended disincentive in the clean air act, Advances in Economic Analysis of Policy 4(2): art 2. http://www.bepress.com/bejeap/advances/vol4/iss2/art2. Accessed 4 Dec 2007.
- Massachusetts v. EPA, 127 S. Ct. 1438 (2007).Google Scholar
- Massachusetts Institute of Technology (MIT). (2007). The Future of Coal. Cambridge, MA.: MIT.Google Scholar
- National Research Council, (2006). New source review for stationary sources of air pollution. Washington, DC: National Academies of Science.Google Scholar
- Patino-Echeverri, D., Burtraw, D., & Palmer, K. (2012). Flexible mandates for investment in new technology. Washington, DC: Resources for the Future Discussion Paper.Google Scholar
- Paul, A., Burtraw, D., & Palmer, K. (2009). Haiku documentation: RFF’s electricity market model version 2.0. Washington DC: Resources for the Future.Google Scholar
- Reinelt, P. S., Keith, D. W. (2007). Carbon capture retrofits and the cost of regulatory uncertainty. Energy Journal, in press for 24(4).Google Scholar
- Richardson, N., (2012). Playing Without Aces: Offsets and the Limits of Flexibility under Clean Air Act Climate Policy, Environmental Law, forthcoming.Google Scholar
- Richardson, N., Fraas, A., & Burtraw, D. (2011). Greenhouse gas regulation under the clean air act: Structure, effects, and implications of a knowable Pathway. Environmental Law Reporter, 41, 10098–10120.Google Scholar
- Stavins, R. N. (2006). Vintage-differentiated environmental regulation. Stanford Environmental Law Journal, 25(1), 29–63.Google Scholar
- Zerbe, R. O. (1970). Theoretical efficiency in pollution control. Western Economic Journal, 8, 364–376.Google Scholar