NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage

Meredith Fowlie

NBER Working Paper No. 14421
Issued in October 2008
NBER Program(s):   EEE

For political, jurisdictional and technical reasons, environmental regulation of industrial pollution is often incomplete: regulations apply to only a subset of facilities contributing to a pollution problem. Policymakers are increasingly concerned about the emissions leakage that may occur if unregulated production can be easily substituted for production at regulated firms. This paper analyzes emissions leakage in an incompletely regulated and imperfectly competitive industry. When regulated producers are less polluting than their unregulated ounterparts, emissions under incomplete regulation can exceed the level of emissions that would have occurred in the absence of regulation. Converseley, when regulated firms are relatively more polluting, aggregate emissions under complete regulation can exceed aggregate emissions under incomplete regulation. In a straightforward application of the theory of the second best, I show that incomplete regulation can welfare dominate complete regulation of emissions from an asymmetric oligopoly. The model is used to simulate greenhouse gas emissions from California's electricity sector under a source-based cap-and-trade program. Incomplete regulation that exempts out-of-state producers achieves approximately a third of the emissions reductions achieved under complete regulation at more than twice the cost per ton of emissions abated.

download in pdf format
   (422 K)

email paper

This paper is available as PDF (422 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14421

Published: Meredith L. Fowlie, 2009. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 72-112, August.

Users who downloaded this paper also downloaded these:
Mansur w13510 Prices vs. Quantities: Environmental Regulation and Imperfect Competition
Holland w15262 Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power
Fowlie, Holland, and Mansur w15082 What Do Emissions Markets Deliver and to Whom? Evidence from Southern California's NOx Trading Program
Kahn and Mansur w16538 How Do Energy Prices, and Labor and Environmental Regulations Affect Local Manufacturing Employment Dynamics? A Regression Discontinuity Approach
Greenstone, List, and Syverson w18392 The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us