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Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form

Ross McKitrick
The Energy Journal
Vol. 26, No. 4 (2005), pp. 43-51
Stable URL: http://www.jstor.org/stable/41323072
Page Count: 9
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Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form
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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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