Upstream versus Downstream Implementation of Climate Policy
This chapter examines the tradeoffs of regulating upstream (e.g., coal, natural gas, and refined petroleum product producers) versus regulating downstream (e.g., direct sources of greenhouse gases (GHG)). In general, regulating at the source provides polluters with incentives to choose among more opportunities to abate pollution. This chapter develops a simple theoretical model that shows why this added flexibility achieves the lowest overall costs. I broaden the theory to incorporate several reasons why these potential gains from trade may not be realized--transactions costs, leakage, and offsets--in the context of selecting the vertical segment of regulation.
I thank Severin Borenstein, Jim Bushnell, Meredith Fowlie, Don Fullerton, Matt Kotchen, Kerry Smith, Chris Snyder, Rob Williams and participants at the NBER conference on The Design and Implementation of U.S. Climate Policy for useful comments on this chapter. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Upstream versus Downstream Implementation of Climate Policy, Erin T. Mansur. in The Design and Implementation of U.S. Climate Policy, Fullerton and Wolfram. 2012