Tietenberg (2006) summarizes 14 simulation studies applied to different pollutants and
regions. In all but two cases, abatement costs would be 40–95 percent lower under emissions
taxes or tradable allowances than under technology mandates, (nontradable) performance
standards, and other policies such as requirements that all sources reduce pollution in the
same proportion. In the context of reducing gasoline, Austin and Dinan (2005) estimate that
policy costs are around 65 percent lower under fuel taxes than more stringent fuel economy
regulation (partly because regulation does not exploit opportunities for fuel savings through
reduced driving). Palmer and Burtaw (2005), Fischer and Newell (2008), and Newell and
Stavins (2003) estimate that, in the power sector, abatement costs would be about 50 percent
lower under emissions pricing than under various performance standards.
In the circumstances considered by these studies, incentive-based policies have a large cost
advantage. However, this may not be true in all cases. For example, the cost advantage will be
modest if there is little heterogeneity among firms so that a single technology mandate can
bring marginal abatement costs close to equality. Similarly, if incentive-based instruments
only have a small effect on product prices, then the failure to optimally exploit the output
reduction channel under direct regulatory approaches will not matter much in practice. And
even if output reduction effects are important, the relative cost differences between emissions
pricing and direct regulatory instruments may decline sharply as abatement approaches
100 percent