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| Author: | Newell R. G. Pizer W. A. |
| Title: | Indexed regulation |
| Journal: | Journal of Environmental Economics and Management
2008 : NOV, VOL. 56:3 p. 221-233 |
| Index terms: | prices quantity regulations uncertainty policy environment |
| Freeterms: | climate change |
| Language: | eng |
| Abstract: | Seminal work by Weitzman unveiled prices are preferred to quantities when marginal benefits are relatively low 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 distributed by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A fractionally 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. |
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