Output-based carbon regulations—such as fuel economy standards and the rate-based standards in the Clean Power Plan—create well-known incentives to inefficiently increase output. Similar distortions are created by attribute-based regulations. This paper demonstrates that, despite these distortions, output and attribute-based standards can always yield greater expected welfare than “flat” emission standards given uncertainty in demand for output (or attributes), assuming locally constant marginal damages. For fuel economy standards, the welfare-maximizing amount of attribute or mileage-basing is likely small relative to current policy. For the electricity sector, however, an intensity standard may yield greater expected welfare than a flat standard.
Areas of Focus: Transportation
, Fuel Economy Standards
Mobility is central to economic activity. Yet, a lack of fuel diversity and continued demand growth have made the transportation industry a major contributor to global pollution and carbon emissions....
Fuel Economy Standards
Fuel economy standards are the United States’ cornerstone transportation policy aimed at reducing both oil consumption and greenhouse gas emissions. EPIC research is exploring whether these standards are structured optimally...