Tradable credit markets for intensity standards

Many environmental standards are expressed in terms of intensity rather than absolute levels. In some cases, intensity standards are associated with tradable credit markets to help reduce firms' compliance costs. I develop a jurisdictional model of credit trading under an intensity standard, framed in terms of a Renewable Portfolio Standard for electric utilities. I find that regulators of firms with low compliance costs always allow for inter-jurisdictional credit trade. Regulators of firms with high costs of compliance allow for credit trade under the condition that extra-jurisdictional credits count less towards compliance compared to credits generated within the jurisdiction. Counter-intuitively, increasing the stringency of the intensity standard when credit trading is possible can have the opposite of the intended effect and actually decrease renewable electricity generation. Using numerical simulations, I show that heterogeneity in terms of renewable costs or externalities across jurisdictions are not sufficient for inter-jurisdictional credit trading to be a stable equilibrium outcome.