Tradable Performance Standards: Innovation through Regulation
A new working paper reviews the effectiveness of credit trading for a number of programs designed to promote clean technology advancement in the transportation sector.
As global temperatures continue to rise, policymakers are working to find ways to spur technology development and cut emissions in the transportation sector, the source of nearly 30 percent of US greenhouse gas emissions. A new study illustrates that tradable performance standards can play an important role in this effort.
A performance standard is a policy that promotes innovation by setting a performance goal (such as a fuel economy standard) without specifying how it should be achieved. Rather than requiring every company to reach this goal, a tradable standard allows companies to trade credits for complying with the program, making the policy more flexible and cost-effective.
An international research team examines four tradable performance standard programs and policies in the US transportation sector: regulations for vehicle greenhouse gas emissions, the state-level Zero Emission Vehicle Program, the Renewable Fuel Standard, and California’s Low Carbon Fuel Standard. The team also compares the effects of these programs and carbon pricing on innovations and product prices.
The authors make two key observations:
- Carbon pricing programs tend to have lower prices, and therefore weaker incentives for technology switching, than existing tradable performance standard programs.
- Policymakers wishing to increase the effect of technology switching by producers could consider coupling tradable performance standards with carbon pricing to foster greater technology innovation.
“Without a comprehensive, global carbon pricing program, policies like tradable performance standards are a useful part of emissions-reduction strategies if we want to reduce the amount of carbon in our atmosphere,” study coauthor and RFF Senior Fellow Dallas Burtraw said. “But these standards can’t act alone—their success is intertwined with other, more efficient emissions-reduction strategies like carbon pricing that we would like to see ramp up over time.”
To learn more about these findings, read the working paper, “Tradable Performance Standards in the Transportation Sector,” by Sonia Yeh (Chalmers University of Technology, Sweden), Dallas Burtraw (RFF), Thomas Sterner (Gothenburg University, Sweden; RFF), and David Greene (University of Tennessee).
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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