Upstream versus Downstream Implementation of Climate Policy


Erin T. Mansur

Chapter 12 in Don Fullerton and Catherine Wolfram, ed. The Design and Implementation of U.S. Climate Policy
Working Paper, June 2010.
NBER Working Paper 16116, June 2010.




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.