Indexed Regulation
Abstract
Seminal work by Weitzman (1974) revealed prices are preferred to quantities when marginal
benefits are relatively flat 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 divided by their correlation is less
than approximately two, indexed quantities are preferred to fixed quantities. A slightly
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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https://hdl.handle.net/10161/6755Citation
Newell, RG; & Pizer, WA (n.d.). Indexed Regulation. Retrieved from https://hdl.handle.net/10161/6755.Collections
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Richard G. Newell
Adjunct Professor
Dr. Richard G. Newell is the President and CEO of Resources for the Future (RFF),
an independent, nonprofit research institution that improves environmental, energy,
and natural resource decisions through impartial economic research and policy engagement.
From 2009 to 2011, he served as the administrator of the US Energy Information Administration,
the agency responsible for official US government energy statistics and analysis.
Dr. Newell is an adjunct professor at Duke University, where he
Billy Pizer
Adjunct Professor in the Sanford School of Public Policy
Billy Pizer joined the faculty of the Sanford School of Public Policy at Duke University
in the fall of 2011. He also was appointed a faculty fellow in the Nicholas Institute
for Environmental Policy Solutions, a nonpartisan institute at Duke that focuses on
finding solutions to some of the nation's most pressing environmental challenges.
His current research examines how we value the future benefits of climate change mitigation,
how environmental regulation and climate policy can af
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