Absolute abundance and relative scarcity: Environmental policy with implementation lags

We study the effectiveness of environmental policy in a model with nonrenewable resources and an unavoidable implementation lag. We find that a time lag between the announcement and the implementation of an emissions quota induces an increase in emissions in the period between the policy's announcement and implementation. Since a binding constraint on emissions restricts energy use during the implementation phase, more of the resources must be extracted outside of it. We call this the abundance effect. In the case of multiple resources that differ in their pollution intensity, a second channel emerges: since cleaner sources are relatively more valuable when the policy is implemented, it is optimal to conserve them before the cap is enforced. This ordering effect tends to induce a switch to dirtier resources before the policy is implemented, compounding the increase in emissions via the abundance channel. Using the announcement lag in Title IV of the 1990 CAAA as a case study we are able to empirically show that the abundance effect and ordering effect are both statistically and economically significant. We discuss a number of alternative policy options to deal with these undesirable side effects of policy announcements. (C) 2011 Elsevier B.V. All rights reserved.