Nonpoint pollution regulation targeted on emission proxies: the role of yardstick schemes

The subject of our paper is the regulation of nonpoint pollution targeted on emissions proxies. We consider n risk-averse sources controlling multiple pollutants, and develop a yardstick competition scheme where the regulatory mechanism depends on the difference between a source’s aggregate performance and the average aggregate performance of all regulated sources. Whether this instrument dominates unit emission taxes depends on the complete structure of the covariance matrix of the common random terms in measured pollution. Moreover, if the number of sources is large enough, the yardstick scheme is always superior to the linear taxation scheme.