Motivating Emissions Cleanup: Absolute vs. Relative Performance Standards

While pollution reduction remains a common policy priority, no consensus exists on how best to stimulate needed action. This paper compares the effectiveness of relative and absolute performance standards in motivating emissions cleanup by stationary polluters. Using a unique panel characterizing Chilean pollution sources, I examine a natural experiment created by a change in the performance standard incentivizing emissions cleanup. I find that the absolute standard drove 33 percent less emissions cleanup than the relative standard and lay out a general means of anticipating which standard will drive greater compliance based on context-specific policy strictness (quantified via mean compliance costs). JEL Codes: D47, D81, H41, Q52, Q53