New RFF Study: "Interpreting Tradable Credit Prices in Overlapping Vehicle Regulations"
A new study, published today by Resources for the Future (RFF), examines the effects of these overlapping regulations on manufacturer behavior and infers the resulting relationship between credit prices and the costs of emission reductions.
For Immediate Release: April 10, 2020
Contact: Lauren Dunlap, 202.328.5006, [email protected]
WASHINGTON, DC—The rapid transformation of the US transportation sector is partly due to three policies that aim to reduce greenhouse gas emissions from light duty vehicles: the federal corporate average fuel economy (CAFE) and greenhouse gas (GHG) standards and the state-level zero-emissions vehicle (ZEV) mandates. Each policy includes a credit-trading program to reduce compliance costs for manufacturers and to allow flexibility for meeting the separate requirements. The prices of these credits can indicate the cost of reducing GHG emissions, either through fuel economy improvements or the sale of zero-emissions vehicles.
A new study, published today by Resources for the Future (RFF), examines the effects of these overlapping regulations on manufacturer behavior and infers the resulting relationship between credit prices and the costs of emission reductions. The study shows that credit prices for overlapping regulations are complex to interpret; for a single, stand-alone policy, credit prices will be equal to the cost of emissions reduction, but for these overlapping regulations, credit prices are lower than the cost of reductions.
The GHG and CAFE standards both aim to decrease GHG emissions by mandating improvements in fuel economy. The authors find that the credit prices for these two programs add up to be roughly equal to the cost of reducing vehicle GHG emissions by one ton. This is because the CAFE and GHG regulations effectively require the same thing, which means that if manufacturers are in compliance with one of these rules, they will be in compliance with the other.
The ZEV program requires automakers to sell a certain number of ZEVs in participating states; in this program, credits are earned from the sale of ZEVs over and above the requirement. The authors find that complying with the ZEV program saves automakers money in complying with the two federal programs. This is indicated by the finding that the cost to produce one additional ZEV is higher than the current ZEV program credit price: each ZEV sold increases the automaker’s average fuel economy, enabling them to spend less on improving the fuel economy of gas-powered and hybrid vehicles. Therefore, the cost of the ZEV policy to manufacturers is lower than expected due to the overlapping federal regulations.
To learn more, read “Interpreting Tradable Credit Prices in Overlapping Vehicle Regulations” by RFF Fellow Benjamin Leard and Senior Fellow Virginia McConnell.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
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