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This paper considers how policy updates and trading of regulated quantities over time changes the traditional comparative advantage of prices versus quantities. Quantity regulation that can be traded over time leads firms to set current prices equal to expected future prices. A government seeking to maximize net societal benefits can take advantage of this behavior with a sequence of quantity policy updates that achieves the first best in all periods. Under price regulation where current prices remain fixed until future policy changes occur, no such opportunity exists to achieve the first best, and prices are never preferred. However, if we assume policy updates are driven in part by political "noise" rather than maximizing net societal benefits, the result changes and prices can again be preferred. The comparative advantage now depends the relative variance of noise shocks compared to true cost and benefit shocks. This contrasts sharply with the traditional comparative advantage that depends on the relative slopes of marginal costs and benefits. Applied to climate change, we estimate the comparative advantage of intertemporally tradable quantities (over prices) to be $2 billion over five years. This estimate grows if updates occur less frequently or could be made negative by political noise.

Zonder onderwerpscode: economie

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Some choices in energy regulation, particularly those that price emissions, raise household energy prices more than others. Those choices can lead to a large variation in burden both across and within income groups because of wide variation in household energy use. The within-income group variation in burden can be particularly hard to remedy. In this paper, we review alternative welfare perspectives that give rise to equity concerns within income groups ("horizontal equity") and consider how they might influence the evaluation of environmental policies. In particular, we look for sufficient statistics that policymakers could use to make these evaluations. We use Consumer Expenditure Survey data to generate such statistics for a hypothetical carbon price versus a tradable carbon performance standard applied to the electric power sector. We show how horizontal equity concerns could overwhelm efficiency concerns in this context.

Zonder onderwerpscode: economie

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Zonder onderwerpscode: economie