Market-Based State Policy


  • Twelve U.S. states have adopted market-based approaches to reduce greenhouse gas emissions.
  • State-based market policies to reduce greenhouse gases have been in operation since 2009.
  • More than a quarter of the U.S. population lives in a state with carbon pricing. These states represent a third of U.S. GDP.

While federal action to reduce greenhouse gas emissions has developed slowly, states have become an important testing ground for climate policies. A handful of leading states have set a price on carbon as an incentive for reductions by major emitters of greenhouse gases. While these states are responsible for only a small portion of global emissions, market-based pricing policies have proved effective at reducing emissions, and serve as important models for other states and for national policy.

Twelve states have adopted carbon pricing policies either as part of a regional initiative or on their own:

  • Ten Northeast states jointly cap power sector emissions through the Regional Greenhouse Gas Initiative (RGGI)
  • California has an economy-wide cap-and-trade system.
  • Washington state’s Clean Air Rule, which is suspended pending a court ruling, set individual emissions caps for large sources across the economy.

State Carbon Pricing Policies

Regional Greenhouse Gas Initiative (RGGI)

Enacted in 2009, RGGI is the first U.S. cap-and-trade program to reduce carbon dioxide (CO2) emissions from the power sector. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont are members. CO2 emissions from power plants throughout the region are capped, and the regulated power plants trade emission allowances. Since the program started, covered emissions have fallen by about half from their 2005 high, and investments from allowance auctions have generated almost $3 billion in economic value for the member states. RGGI states announced in August 2017 their intent to reduce covered emissions another 30 percent between 2020 and 2030.

Twelve states have adopted carbon pricing policies as part of a regional initiative or on their own.

California cap and trade

Unlike RGGI, which covers only the power sector, California’s cap-and-trade program covers virtually the entire state economy. It was the first multi-sector cap-and-trade program in North America. The greenhouse gas emissions cap set under the program will decrease about 3 percent annually to help the state achieve its legislated goal to reduce emissions to 1990 levels by 2020. After that, under a state law enacted in 2017, the cap will be further reduced to help achieve an additional 40 percent reduction in state emissions by 2030. The program is linked with a similar program in the Canadian province of Québec.

Washington Clean Air Rule

Washington’s Clean Air Rule remains suspended as it works its way through the court system.

The rule, adopted by the Department of Ecology in 2016, is aimed at reducing emissions from significant in-state stationary sources, petroleum product distributors and importers, and natural gas distributors. Covered entities could also use tradable units from three eligible sources: reduction units generated by other covered parties who overachieve their target; specified offsets; or out-of-state emissions market program allowances. Starting in 2017, the program would have required covered entities to reduce their emissions 1.7% annually. The compliance threshold was to begin at 100,000 metric tons in the 2017–2019 period and decrease by 5,000 metric tons every three years, reaching 70,000 metric tons in 2035.

Several businesses sued after the rule was issued, arguing the agency exceeded its authority. In December 2017, a superior court ruled that the state lacks the authority to regulate indirect emitters (natural gas and petroleum suppliers) without legislative approval and suspended the rule. In May 2018, the Department of Ecology appealed to state’s Supreme Court to review the lower court ruling.

In January 2020, the Washington State Supreme Court upheld portions of the Clean Air Rule that applies to direct emitters (e.g., stationary sources) and invalidated the portions that applied to indirect emitters (e.g., natural gas distributors and petroleum suppliers), and remanded the case back to a lower court to determine how to separate the rule. Based on the Supreme Court ruling, a revised rule would likely cover about 18 percent of the state’s emissions, trading would be limited to regulated entities, opportunities for offsets would be limited, and participation in out-of-state emissions programs may be limited.