Local Standards, Behavioral Adjustments, and Welfare: Evaluating California’s Ocean-Going Vessel Fuel Rule

We examine how adjustments along unregulated margins affect welfare outcomes of a local fuel standard established by California’s Ocean-Going Vessel Fuel Rule, which targets particulate matter pollution from maritime transport by requiring the use of low-sulfur fuel in California’s coastal waters. Using sharp within-route temporal discontinuities in voyage-level data on vessel movements we show that vessels respond to the higher fuel prices imposed by the standard by shifting activity to unregulated waters and reducing speeds in the regulated area. We combine observed vessel movements with simple physical relationships and location-specific marginal damages to quantify the welfare consequences of these adjustments. We find that behavioral adjustments erode roughly $4.8 million per month in emission benefits but lower compliance costs by $2 million per month, both of which are sizable fractions of the aggregate net benefits of the policy.