Journal of Regulatory Economics

, Volume 44, Issue 2, pp 121–155 | Cite as

Flexible mandates for investment in new technology

  • Dalia Patino-Echeverri
  • Dallas Burtraw
  • Karen Palmer
Original Article


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.


Technology standards Climate change Uncertainty   Carbon capture and storage 

JEL Classification

Q52 Q55 Q58 



The authors are grateful to Rich Sweeney, Susie Chung, Margaret Goulder, Varun Kumar, Erica Myers, Matthew Woerman and Anthony Paul for technical assistance, and to Catherine Wolfram and participants in seminars at Carnegie Mellon University and North Carolina State University for helpful comments. This study received support from the BigCCS Centre, formed under the Norwegian research program Centres for Environment-friendly Energy Research (FME), with contributions from the following partners: Aker Solutions, ConocoPhilips, Det Norske Veritas AS, Gassco AS, Hydro Aluminium AS, Shell Technology AS, Statkraft Development AS, Statoil Petroleum AS, TOTAL E&P Norge AS, GDF SUEZ E&P Norge AS, and the Research Council of Norway (193816/S60). Patino-Echeverri received financial support from the Center for Climate and Energy Decision Making funded by the National Science Foundation (SES-0949710).Model development was supported by EPA STAR grant RD-83099001, Mistra’s Climate Policy Research Forum (Clipore) and the Joyce Foundation.


  1. 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
  2. Bannon, B., DeBell, M., Krosnick, J.A., Kopp, R., Aldhous, P. (June 2007). Americans’ Evaluations of Policies to Reduce Greenhouse Gas Emissions. Accessed 21 Sep 2010.
  3. Baumol, W. J., & Oates, W. E. (1988). The theory of environmental policy. Cambridge, UK: Cambridge University Press.Google Scholar
  4. Bergerson, J. & Lave, L. (2007). Baseload coal investment decisions under uncertain carbon legislation. Environmental Science and Technology, 41(10), 3431–3436.Google Scholar
  5. 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
  6. Carnegie Mellon University (2010). Integrated Environmental Control Model-CS, version 5.2.1.
  7. Dixit, A. K., & Pindyck, R. S. (1994). Investment under Uncertainty. Princeton, NJ: Princeton University Press.Google Scholar
  8. Downing, P. G., & White, L. J. (1986). Innovation in pollution control. Journal of Environmental Economics and Management, 13, 18–29.CrossRefGoogle Scholar
  9. DSIRE (2012). Database of State Incentives for Renewable & Efficiency. Accessed 31 Nov 2012.
  10. Energy Information Administration (EIA). (2010). Annual Energy Outlook 2010, DOE/EIA-0383(2010), May.Google Scholar
  11. Energy Information Administration (EIA). (2007a). Annual Energy Outlook 2008 (Early Release), DOE/EIA-0383(2008).Google Scholar
  12. 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
  13. Evans David, A., Hobbs, B. F., & Palmer, K. L. (2008). Modeling the effects of changes in new source review on national \(\text{ SO }_{2}\) and \(\text{ NO }_{\rm X}\) emissions from electricity-generating units. Environmental Science and Technology, 42(2), 347–353.CrossRefGoogle Scholar
  14. 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
  15. Gruenspecht, H. K. (1982). Differentiated regulation: The case of auto emissions standards. American Economic Review, 72(2), 329–332.Google Scholar
  16. 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. Accessed 4 Dec 2007.
  17. Magat, W. A. (1978). Pollution control and technological advance: A dynamic model of the firm. Journal of Environmental Economics and Management, 5, 1–25.CrossRefGoogle Scholar
  18. Maloney, M., & Brady, G. L. (1988). Capital turnover and marketable pollution rights. Journal of Law and Economics, 31(1), 203–226.CrossRefGoogle Scholar
  19. Massachusetts v. EPA, 127 S. Ct. 1438 (2007).Google Scholar
  20. Massachusetts Institute of Technology (MIT). (2007). The Future of Coal. Cambridge, MA.: MIT.Google Scholar
  21. Milliman, S. R., & Prince, R. (1989). Firm incentives to promote technological change in pollution control. Journal of Environmental Economics and Management, 17, 247–265.CrossRefGoogle Scholar
  22. National Research Council, (2006). New source review for stationary sources of air pollution. Washington, DC: National Academies of Science.Google Scholar
  23. Nelson, R. A., & Tietenberg, T. (1993). Differential environmental regulation: Effects on electric utility capital turnover and emissions. Review of Economics and Statistics, 75(2), 368–373.CrossRefGoogle Scholar
  24. 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
  25. Patino-Echeverri, D., Morel, B., Apt, J., & Chen, C. (2007). Should a coal-fired power plant be replaced or retrofitted? Environental Science Technology, 41(23), 7980–7986.CrossRefGoogle Scholar
  26. 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
  27. 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
  28. Richardson, N., (2012). Playing Without Aces: Offsets and the Limits of Flexibility under Clean Air Act Climate Policy, Environmental Law, forthcoming.Google Scholar
  29. 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
  30. Rubin, Edward S., & Chen, Chao. (2007). Cost and performance of fossil fuel power plants with \(\text{ CO }_{2}\) capture and storage. Energy Policy, 35, 4444–4454.CrossRefGoogle Scholar
  31. Sekar, R. C., Parsons, J. E., Herzog, H. J., & Jacoby, H. D. (2007). Future carbon regulations and current investments in alternative coal-fired power plant technologies. Energy Policy, 35(2), 1064–1074.CrossRefGoogle Scholar
  32. Stavins, R. N. (2006). Vintage-differentiated environmental regulation. Stanford Environmental Law Journal, 25(1), 29–63.Google Scholar
  33. Zerbe, R. O. (1970). Theoretical efficiency in pollution control. Western Economic Journal, 8, 364–376.Google Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Dalia Patino-Echeverri
    • 1
  • Dallas Burtraw
    • 2
  • Karen Palmer
    • 2
  1. 1.Nicholas School of the Environment, Duke UniversityDurhamUSA
  2. 2.Resources for the FutureWashingtonUSA

Personalised recommendations