Lagged Regulation of Energy Industries

In a variely of contexts regulatory agencies are legally obliged to use a cost-benefit rule (or some variant there of) to revise environmental standards to reflect improvements m pollution-control techniques, but have considerable discretion over the timing of such revision. How should the agency use this discretion? In a simple model of standard-setting under endogenous technical change we show that an agency can use implementation lags strategically to effect the supply of new ‘clean’ technologies. Longer lags tend to encourage more intense R&D effort by the regulated industry itself whilst discouraging parallel effort by external developers. Optimal implementation lags are characterized. The analysis calls into question the conventional view that ‘foot-dragging’ by agencies is necessarily evidence of incompetence andlor regulatory capture and will, m general, be an efficient strategic response by the executive agency to the need to manipulate dynamic incentives. EV21 Oxford Institute for Energy Studies 1995 The contents of this paper are the author’s soie responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members