Regulatory triggers and New Source Review

Firms can sometimes preempt regulation by changing the nature, scale or location of their activities. The objectives of this paper are to model such preemptive behavior and to draw out implications for regulatory design. Applications to New Source Review are emphasized. Regulatory triggers defined on emissions have a clear rationale. A modest trigger on refurbishment expenditures is sometimes beneficial, depending on the sources of variation among firms. However, such benefits are likely to be small.

► This is a theoretical examination of optimal regulatory responses to offsetting behavior, whereby firms alter their choices to avoid regulations from applying. ► The primary application is a simplified version of New Source Review. ► A requirement for New Source Review for plants that increase emissions can be beneficial under a wide range of circumstances. ► However, the case for requiring New Source Review for plants with sufficient refurbishment is sensitive to specific circumstances.