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Regulatory Change and Optimal Transition Relief

Grandfathering has become a common practice in regulating industries like coal power generation. But it is not clear that phasing out polluting plants is beneficial. The costs of retrofitting existing plants to comply with new standard can be higher than the compliance costs for a new plant. Since the costs of shifting to new technology must be borne at some point, (since granfathering can’t be indefinite) it might be best not to grandfather at all so that society can benefit from lower pollution levels earlier.

The assumption that regulators should first pick the standard that is optimal for new plants and then choose the best transition rule in light of that standard is also flawed. Instead, both the new rule and the transition rule need to be optimized simultaneously.

Finally, routinely allowing grandfathering can result in undesirable legal changes and wasteful lobbying. The Clean Air Act offers a case study on how existing actors lobby extensively for continued grandfathering as the existing grandfathering benefit is about to expire.

These questions and more are examined in this working paper.