Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read More
There are a variety of policy tools to reduce the greenhouse gas emissions responsible for climate change. This installment of the Climate Change 101 series explains how a cap-and-trade program sets a clear limit on greenhouse gas emissions and minimizes the costs of achieving this target. By creating a market and a price for emission reductions, cap and trade offers an environmentally effective and economically efficient response to climate change.
By: David L. Greene and Steven E. Plotkin
Download this paper (pdf)
Project Director: Judi Greenwald
Project Manager: Nick Nigro
This report examines the prospects for substantially reducing the greenhouse gas (GHG) emissions from the U.S. transportation sector, which accounts for 27 percent of the GHG emissions of the entire U.S. economy and 30 percent of the world’s transportation GHG emissions. Without shifts in existing policies, the U.S. transportation sector’s GHG emissions are expected to grow by about 10 percent by 2035, and will still account for a quarter of global transportation emissions at that time. If there is to be any hope that damages from climate change can be held to moderate levels, these trends must change.
This report shows that through a combination of policies and improved technologies, these trends can be changed. It is possible to cut GHG emissions from the transportation sector cost-effectively by up to 65 percent below 2010 levels by 2050 by improving vehicle efficiency, shifting to less carbon intensive fuels, changing travel behavior, and operating more efficiently. A major co-benefit of reducing transportation’s GHG emissions is the resulting reductions in oil use and improvements in energy security.
It develops three scenarios that diverge from “business as usual,” based on the assumption that the United States is willing to change the incentives and regulations that affect the design of vehicles, the types of fuels that are used, the choices made by individuals and businesses in purchasing and using vehicles, and how communities and their transportation infrastructure are built and used.
This report is an update of the Center's 2003 report on Reducing Greenhouse Gas Emissions From U.S. Transportation
Related white papers on Transportation Reauthorization:
About the Authors:
David L. Greene is a Corporate Fellow of Oak Ridge National Laboratory, Senior Fellow of the Howard H. Baker, Jr. Center for Public Policy and a Research Professor of Economics at the University of Tennessee. He is an author of more than 200 publications on transportation and energy issues. Mr. Greene is an emeritus member of both the Energy and Alternative Fuels Committees of the Transportation Research Board and a lifetime National Associate of the National Academies. He received the Society of Automotive Engineers’ Barry D. McNutt Award for Excellence in Automotive Policy Analysis, the Department of Energy’s 2007 Hydrogen R&D Award, and was recognized by the Intergovernmental Panel on Climate Change for contributions to the IPCC’s receipt of the 2007 Nobel Peace Prize. He holds a B.A. from Columbia University, an M.A. from the University of Oregon, and a Ph.D. in Geography and Environmental Engineering from The Johns Hopkins University.
Steven Plotkin is a staff scientist with Argonne National Laboratory’s Center for Transportation Research, specializing in analysis of transportation energy efficiency. He has worked extensively on automobile fuel economy technology and policy as a consultant to the Department of Energy, and was a co-principal investigator on ANL’s Multi-Path Transportation Futures Study. Mr. Plotkin was a lead author on the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report Climate Change 2007: Mitigation of Climate Change and has been selected to participate on the Fifth Assessment Report. He was for 17 years a Senior Analyst and Senior Associate with the Energy Program of the Congressional Office of Technology Assessment (OTA) and prior to that he was an environmental engineer with the U.S. Environmental Protection Agency. Mr. Plotkin has a B.S. degree in Civil Engineering from Columbia University and a Master of Engineering (Aerospace) degree from Cornell University. He is the 2005 recipient of the Society of Automotive Engineers’ Barry D. McNutt Award for Excellence in Automotive Policy Analysis.
With EPA’s recent announcement of timelines for additional regulation of greenhouse gases (utility and refinery sectors) and the arrival in town this week of the new Congress, the shouting about EPA’s regulatory actions has already begun. Many of these claims are clearly political posturing – the facts are that schools, churches, and libraries will NOT be subject to regulations, there will NOT be a moratorium on all new industrial facilities for at least 18 months, and new coal plants will NOT be banned. But it is also true that regulating greenhouse gases (GHGs) has the potential to substantially impact our economy and is critical to reducing the risks and costs associated with climate change. The critical challenge facing EPA is how to properly balance the costs of reducing GHG emissions against the benefits of limiting climate change. How EPA balances these interests demands a serious discussion. In an effort to lower the volume and better inform future discussions about EPA’s use of its regulatory authority, the following are key factors that should be considered.
1. EPA is not overreaching by regulating greenhouse gases (GHGs) under the Clean Air Act but is doing so in direct response to the Supreme Court’s 2007 ruling in Mass. v. EPA.
Some have incorrectly claimed that EPA has overstepped its authority in regulating greenhouse gases and is attempting to regulate GHGs even though Congress failed to pass climate legislation last year. In fact, it is the Supreme Court in 2007 that clarified that EPA had the authority to regulate GHGs under the existing Clean Air Act. EPA had denied a petition by some states and environmental groups calling on it to begin regulating GHGs under the existing Clean Air Act. The Supreme Court rejected EPA’s claim that the Clean Air Act does not apply to GHGs and held that these emissions meet the definition of an “air pollutant” under the Act. The court held that “under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” Based on its extensive review of the scientific evidence in its endangerment finding, EPA reached the only conclusion that the evidence supported – that GHG emissions cause or contribute to air pollution, which may reasonably be anticipated to endanger public health or welfare and, therefore, are subject to regulation under the Clean Air Act.
2. EPA’s regulations will not require unproven technologies, impose excessive costs at a time when our economy is hurting, or harm small and previously unregulated sources.
There are legitimate concerns that the Clean Air Act was not developed specifically with GHGs in mind and these emissions are different in fundamental ways from traditional hazardous and criteria pollutants covered by the Act. As a result, EPA has gone to great lengths to “tailor” its regulations -- for example, with respect to new source permitting -- in such a way that only the largest sources of GHGs are covered. This tailoring rule has been challenged in courts (along with all other GHG regulations). If it is overturned, Congressional intervention would likely be necessary. But the Clean Air Act includes many provisions that minimize compliance costs, and many of its fundamental requirements apply equally well to regulating GHGs. For example, the Act requires that technological feasibility and costs be considered in setting emission performance standards and allows for different requirements for new and existing sources. In its guidance to states on what constitutes “best available control technology,” EPA has focused on energy efficiency technologies as a means to achieve both reductions in GHG emissions and cost savings to firms. The agency has also made it clear that the use of coal as a fuel can be continued under its guidelines. While EPA regulations will impose some costs on firms, based on guidance to date, those costs are likely to be modest and will result in far greater benefits than costs to society.
3. Delaying any EPA regulatory actions would be bad for business and bad for the climate.
Delaying regulations by EPA will allow some firms to avoid compliance costs in the near term but will increase overall costs over the longer term. For firms in states already facing GHG requirements (e.g., utilities in 10 northeast and mid-Atlantic states, large emitters in California), any delay in EPA regulations are not likely to alter the requirements they face. For firms in other locations that are planning facilities with long lifetimes, some are likely to install the same technology that would be required by EPA in an effort to avoid more expensive retrofits in the near future. These firms would prefer the certainty of knowing what regulatory requirements they must meet prior to making large capital investments. Finally, delay in reducing GHG emissions will result in greater economic harm throughout our society as families and communities face the costs associated with increases in extreme weather (droughts and floods), impacts from sea level rise, limits on the availability of water resources, and other climate impacts.
4. EPA’s regulatory actions are not a form of backdoor cap and trade or an energy tax.
Congress rejected a comprehensive cap-and-trade approach to regulating GHG in its last session. EPA’s approach does not rely on a cap-and-trade regime and is far from comprehensive. EPA’s regulations focused first on the transportation sector with the issuance of widely supported standards for light-duty vehicles and proposed standards for medium and heavy-duty vehicles. On the stationary source side, EPA first targeted the largest new sources and major modifications of existing sources and recently announced plans to develop new source performance standards for the electric utility and refinery sectors. Such standards are the traditional approach used under the Clean Air Act and are generally implemented through state programs.The regulations are being developed on a timeframe consistent with Clean Air Act requirements covering other pollutants to allow covered sources the flexibility of developing compliance plans that cost-effectively meet a comprehensive set of requirements.
5. EPA is not attempting to meet the same reduction requirements that were rejected by the last Congress.
The House-passed climate change bill called for reductions in GHG emissions of 17 percent of 2005 levels by 2020, increasing to reductions of over 80 percent by 2050. EPA’s use of the Clean Air Act is not likely to produce emission reductions of the magnitude or in the timeframe set forth in the legislation proposed last year.
6. Important questions do need to be addressed in moving forward.
EPA’s initial set of regulations represent an important beginning in addressing the risks associated with climate change but also raise important issues. In moving forward, several questions will need to be addressed:
* How will EPA’s regulation be implemented in a manner consistent with current and future state actions?
* Given market forces driving utilities toward increased use of natural gas, the regulatory uncertainty that currently exists, and the age and fuel mix of the current utility fleet, what is the likely future role of coal in this sector?
* As EPA moves forward in regulating stationary sources through the use of emission performance standards, how might it be able to provide flexibility to regulated sources to achieve cost-effective reductions?
* How might EPA regulatory actions specific to utilities interact with possible Congressional interest in a clean energy standard?
Steve Seidel is Vice President for Policy Analysis
By Eileen Claussen
December 20, 2010
2010 was a year of highs and lows.
On the high side were global temperatures; 2010 will mark the hottest year in recorded history. At the start of the year, there was also the short-lived high of thinking we might be on the precipice of meaningful action in the U.S. Congress to protect the climate. Finally, at year’s end the climate talks in Cancún delivered (surprise!) tangible results in the form of agreement on key elements of a global climate framework.
But alas, the lows won out for most of 2010 as a trumped-up email controversy, continuing economic unease, and growing anti-government sentiment in the United States undermined the effort to forge lasting climate solutions at all levels.
Congress. Until quite recently, the Pew Center and many others were actively supporting cap and trade as the number-one climate policy solution. After the House passed a fairly comprehensive energy and climate bill in June 2009 that had a cap-and-trade system at its core, we actually thought that it might become the law of the land.
Before long, however, it became eminently clear that the Senate would not be able to pass a similar bill. The 2010 U.S. elections, which brought more doubters of climate change into the halls of Congress, only made it clearer that comprehensive climate action is off the table for now.
EPA. With Congress unable to pass comprehensive climate legislation in 2010, attention turned to what EPA might be able to do under existing authorities. And it turns out that EPA can do quite a lot by taking reasonable steps that have garnered critical support from the business and environmental communities. In late October, for example, the agency announced a sensible proposal to reduce greenhouse gas emissions and improve fuel efficiency for medium and heavy-duty vehicles. This was followed by a November announcement that will go a long way to making sure that new industrial facilities use state-of-the-art technologies to boost efficiency and reduce emissions.
Of course, opponents of these and other EPA regulations will surely raise a ruckus, and there will be loud cries in Congress to delay the regulations and even cut funding for the EPA. But the possibility remains that the agency could conceivably begin to chip away at U.S. emissions in the months and years ahead.
State Actions. Looking beyond Washington, state capitals were the focus of creative thinking and leadership on the issue of clean energy in 2010. Massachusetts, for example, set a statewide energy efficiency standard in 2010 supported by $1.6 billion in incentives. Meanwhile, California voters upheld the state’s greenhouse gas reduction law by defeating Proposition 23. This marked the first direct vote on addressing climate change in the United States, and it won in an overwhelming fashion.
But the overall story regarding climate action in the states was more mixed. While several regional climate initiatives continued to push forward, the November elections brought to the nation’s statehouses a group of new leaders who adopted strong stands against climate action in their campaigns. We will stay tuned to see how their campaign rhetoric translates into governing.
International. The agreement reached by international negotiators in Cancún in December closed out 2010 on a positive note. The Cancún Agreements import the essential elements of the 2009 Copenhagen Accord into the U.N. Framework Convention on Climate Change, including a stronger system of support for developing countries and a stronger transparency regime to better assess whether countries are keeping their promises. The Cancún Agreements also mark the first time that all of the world’s major economies have made explicit mitigation pledges under the Convention.
Of course, the ultimate goal of the continuing international talks should be a legally-binding climate treaty, but in Cancún we saw countries agreeing on incremental steps that will deliver stronger action in the near term and lay the foundation for binding commitments down the road.
Looking Ahead. Looking ahead, I believe 2011 holds promise only if those of us who support climate action can learn from what happened in 2010. In recent years, domestic and international efforts largely centered on a “big bang” theory of trying to achieve everything at once. Instead, it’s instructive now to take a cue from Cancún and accept that a step-by-step approach to building support for climate solutions offers our best shot at progress.
Calling on the new Congress to pass cap and trade or similarly comprehensive solutions will be a nonstarter, for example. But there may be an opportunity on Capitol Hill for less sweeping steps to reduce U.S. emissions.
Supporters would do well to spend the next several months laying the groundwork for incremental solutions by strengthening communications with the public. We need to do a better job of helping people understand both the risks and the opportunities presented by climate change. In the same way we buy fire insurance to protect against an event that has a statistically small chance of happening but would result in severe damage, acting now to cut emissions reduces our vulnerability to severe events that are likely to become more common in a warming world. And the success of the “No on Prop 23” campaign in California suggests that there remains a healthy appetite among the general public and in the business community (which provided substantial support for the effort) to back well-framed climate solutions.
After a year of highs and lows, we still must aim high in our efforts to address one of the greatest challenges of our time. But we should also heed the lessons of the past year and work for more modest victories now that can keep us on the path to longer-term solutions.
Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read more
This post also appears in National Journal's Cancún Insider blog.
CANCUN – We’ll see tomorrow here in Cancún whether countries are ready to move past binding-or-nothing in the international climate effort.
For the past five years, negotiators have deadlocked over whether and how to extend a legally binding climate regime beyond 2012, when the first Kyoto targets expire. In that time, over countless sessions, the U.N. climate talks have produced little in the way of tangible results.
Cancún is an opportunity for a more sensible approach.
Last Thursday, the California Air Resources Board (CARB) published details on the proposed greenhouse gas trading program to be implemented under state law AB 32. AB 32, as our blog readers know, is under threat from Proposition 23 – which would forestall (perhaps indefinitely) meaningful action to reduce greenhouse gases in California. The analyses done by CARB in association with the development of the proposed program bolster the case for rejecting Prop 23.
These CARB analyses show that the trading program under AB 32 will “shift investment and growth within the overall economy toward those sectors driven by the production of cleaner and more-efficient technologies.” The importance of this targeted growth should not be understated – by moving toward energy technologies that are both home-grown and energy efficient, we reduce our economic exposure to the price volatility of global energy markets. Since the world is using more and more of what are ultimately finite quantities of fossil energy, protecting ourselves by transitioning the economy toward energy systems that are not subject to global supply and demand imbalances is important to protecting our future economic growth.
While transitioning to new and different systems for energy production and use will necessarily result in some temporary economic dislocation, the market mechanisms included in CARB’s regulatory program minimize these impacts. Taken directly from the CARB economic analysis appendix: “Overall, staff finds no significant adverse impacts on California business or consumers as a whole as a result of the proposed regulation.”
With climate change legislation stalled on Capitol Hill in Washington, D.C., for the foreseeable future, maintaining the critical environmental legislation of AB 32 is extremely important for advancing the nation’s climate policy. Even absent action by other states, California is the world’s 8th largest economy and a significant contributor to global greenhouse gas emissions. Action taken through policy in California is a huge step forward in addressing the global climate crisis.
Much of the rest of the world is waiting for the United States to take a leadership role on the issue of global climate change. With political gridlock in D.C., the best chance for the nation to make significant progress on this issue starts in California. AB 32 is the start of California’s transition to a 21st century economy of clean, green, homegrown energy – and represents an opportunity for the state, and the nation, to retake a leadership position in what will be some of the most important industries of the coming decades.
Russell Meyer is the Senior Fellow for Economics and Policy
At a time when political gridlock in Washington has blocked climate legislation, EPA and NHTSA have jointly come forward with a sensible proposal that will substantially reduce oil consumption and greenhouse gas (GHG) pollution from heavy-duty trucks. EPA and NHTSA’s proposed new rules build on their recent success in finalizing GHG and fuel efficiency standards for cars and light-duty trucks. Once again, the two agencies collaborated with industry to make sure their standards accomplish environmental and energy security goals in a practical manner.
The transportation sector is responsible for 27 percent of our nation’s GHG emissions. Within this sector, heavy-duty vehicles are the second largest source of emissions (after light-duty vehicles), accounting for 20 percent of the sector’s total. The new proposal covering heavy-duty vehicles (long-haul trucks, large pick-ups and vans, school and transit buses, and utility trucks) manufactured from 2014 through 2018 is estimated to reduce emissions by 7-20 percent from these vehicles (depending on the category of truck) from current levels, achieving an overall reduction of 250 million metric tons of carbon dioxide over the life of the vehicles sold during this five-year period. As a result, emissions in 2030 from this fast growing subsector will be 9 percent below what they would have been in the business as usual case. The proposed rule is also estimated to reduce oil consumption by 500 million barrels over this same period.
Cost and Benefits
To achieve the proposed standards, truck manufacturers will need to modify their vehicles drawing from a range of existing technologies including improvements in aerodynamic designs, lower rolling resistant tires, advanced transmissions, and reduced idling. The agencies report that the cost of meeting the standard for many trucks will be recouped in less than 2 years in the form of fuel savings. The regulatory impact analysis accompanying the proposed rule looks at both the costs and benefits of meeting the proposed standards. It shows the following:
Estimated Lifetime Discounted Costs and Benefits for 2014-2018 Model Year Heavy-Duty Vehicles
|3 percent discount rate||$ billions|
The bottom line is clear – with a net benefit to society of $41 billion, the proposed rule is a worthwhile investment in reducing both our reliance on foreign oil and our emissions of greenhouse gases.
Steve Seidel is Vice President for Policy Analysis
Steve Seidel, vice president for policy analysis, co-wrote this post.
With the failure of the Senate to act on climate change legislation, the focus of attention now shifts to possible regulatory actions by EPA. The Supreme Court in 2007 made it clear that greenhouse gases (GHGs) are pollutants under the existing Clean Air Act (CAA), and the overwhelming scientific evidence (spelled out in great detail in the endangerment finding) demonstrates that such pollutants represent possible harm to public health and welfare.
Opposition to EPA action rests in part on concerns that any regulations will be excessively costly and burdensome to households and U.S. manufacturers. While it is certainly true that regulating GHGs will result in costs, it is also important to look at whether the economic benefits from those regulations will be greater than the costs they impose. In other words, will societal costs of allowing global GHG emissions to continue unabated (costs that will come in the form of impacts from rising sea levels, increased extreme weather including heat waves and droughts, among others) be greater than the costs of regulating those emissions responsibly?
This basic regulatory framework – that regulatory costs should be less than the resulting benefits – is codified in OMB review of all major federal regulations by both Republican and Democratic Administrations, has historically been applied to all EPA regulations, and would certainly be applied to any future regulations of GHGs.
So what have been the costs and benefits of past EPA regulations under the CAA historically? Congress required EPA to undertake a retrospective assessment of the costs and benefits of regulations under this statute. The conclusion of this retrospective review is that the CAA resulted in total benefits that are around $37 trillion, while total costs were $0.874 trillion (in 2010 dollars) – an astounding 40 to 1 benefit to cost ratio!
EPA has also produced a prospective assessment of the costs and benefits of the CAA – this time for the time period of 1990 through 2010. In this review, EPA estimated that the most likely benefit to cost ratio of the CAA for this period is 4 to 1. While a very strong and positive value, the ratio is substantially lower than the estimated benefits for the first 20 years of the CAA.
This is not unexpected – early gains are usually greater, and more cost effective, because simple or cheap remedies are the first to be applied in response to regulatory requirements. As those requirements become more stringent, creating additional benefits becomes more costly (from an economics perspective this is described as moving up the marginal cost curve).
How credible is EPA’s assessment of its regulations? Alan Krupnick, formerly of the President’s Council of Economic Advisors, has testified before Congress about the credibility of EPA’s analyses: “Under the auspices of the agency’s Science Advisory Board, both studies were scrutinized throughout the decade-long preparation by at least three expert committees of outside economists, air quality modelers, epidemiologists, and other health experts.”
In addition to these EPA assessments, there have been a handful of quality external analyses of the costs and benefits of the CAA. The Office of Management and Budget (OMB) found that the “major rules” from EPA’s Office of Air resulted in total benefits between $145 and $218 billion annually, for the years between 1992 and 2002. This is compared to costs of between $22 and $25 billion over that same period. A study by researchers at MIT found total annual benefits rising from $50 billion in 1975 to $400 billion in 2000. This report accounts for the monetary benefits of avoided premature death differently than the EPA studies, and as a result reports lower values for the total benefits. A sum of the total discounted benefits yields a total benefit of $6.85 trillion from 1975 through 2000 – a figure still substantially greater than the EPA estimate for the costs of the regulations.
So how might this play out in terms of future regulations of GHGs? EPA’s first GHG regulations were standards set for light duty vehicles (which it coordinated with the efficiency standards set by NHTSA). These standards are expected to lead to net benefits of between $0.5 and 1.2 billion dollars (discounted back to present values using 7 percent and 3 percent discount rates, respectively) without even including a social cost of carbon. If a value is assigned to the avoided GHG emissions associated with this regulation, the net present benefits are even greater!
If there is a lesson that can be drawn from these previous regulatory efforts it is that while regulations do impose real costs, EPA’s actions under the CAA have consistently led to positive environmental and economic outcomes. By not regulating, we would have foregone these positive net benefits and incurred the social costs imposed by unabated pollution.
So the next time someone tells you that the costs of reducing air pollution are too high, ask them what would be the costs to society of not reducing those emissions.
Russell Meyer is the Senior Fellow for Economics and Policy. Steve Seidel is Vice President for Policy Analysis.
Cap and trade has gotten a bad rap. It’s been vilified as a national energy tax, an elaborate Ponzi scheme, and a giveaway to corporate polluters.
While these attacks are wrong, they succeeded in shaping the political discourse around national climate and energy policy, which undoubtedly contributed to last week’s decision by Senate leaders to delay consideration of legislation that would limit greenhouse gas emissions.
This is unfortunate. We need a national policy to reduce emissions, and, as our new white paper shows, cap and trade is still the best, most cost-effective way of doing so. When lawmakers turn their attention back to this issue — as they must — they should make cap and trade a foundational element of the policy response to climate change.