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Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form

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  • Ross McKitrick

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.

Suggested Citation

  • Ross McKitrick, 2005. "Decentralizing a Regulatory Standard Expressed in Ratio or Intensity Form," The Energy Journal, , vol. 26(4), pages 43-52, October.
    • Handle: RePEc:sae:enejou:v:26:y:2005:i:4:p:43-52
    DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No4-3
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