Regulatory Options for an Enforceable Cap-and-Invest Program in Maryland

Climate change is the defining environmental problem of our time. Recent assessment reports from the Intergovernmental Panel on Climate Change and the US government have highlighted the urgency of reducing greenhouse gas (GHG) emissions to net zero (and beyond) in the next few decades to avoid the most catastrophic effects of climate change.

Eliminating GHG emissions throughout the global economy will entail comprehensive actions to reshape society’s approach to producing and using energy. Shifting to complete reliance on low- and zero-emissions sources of energy will require substantial investments in technology and infrastructure. Such investments could simultaneously drive economic growth and deliver environmental benefits in disproportionately impacted communities. We use the term disproportionately impacted communities throughout this report to refer to both overburdened and underserved communities, as defined by Maryland’s Climate Solutions Now Act (CSNA). Accomplishing a rapid energy transition—and doing so in a way that seizes the economic opportunity of that transition—will require a supportive policy framework.

The state of Maryland has already taken significant policy steps to guide its own transition. Reductions in emissions from the power sector are guided by Maryland’s membership in the Regional Greenhouse Gas Initiative (RGGI) and further supported by the state’s renewable portfolio standard (RPS). Efforts to address transportation emissions include the forthcoming Advanced Clean Cars II rule, under which the share of zero-emissions vehicles will reach 100 percent of new-vehicle sales by 2035, and the Advanced Clean Truck rule (effective in 2027). Building energy performance standards will require a 20 percent reduction in direct GHG emissions from existing large buildings by 2030, relative to 2025.

Maryland’s efforts to reduce emissions also benefit from existing sector-specific federal mitigation policies: for the power sector, tax credits for solar, wind, and other low-carbon generation; for the transportation sector, electric vehicle and sustainable fuel credits, electric vehicle infrastructure investments, and GHG emissions standards for light-, medium-, and heavy-duty vehicles; for the residential sector, energy efficiency home tax credits and other consumer tax credits; and for the industrial sector, incentives for clean hydrogen and carbon capture and storage.

As required by the Climate Solutions Now Act (CSNA), the Maryland Department of the Environment (MDE) released its Climate Pollution Reduction Plan in December 2023, outlining policy actions to reach the state’s ambitious climate goals: reducing GHG emissions by 60 percent from 2006 levels by 2031, achieving 100 percent clean energy by 2035, and reaching net-zero emissions by 2045. Highlights of the plan include the following:

• completing the transition away from coal-fired power plants;
• scaling up renewable infrastructure, including solar, wind, and battery power;
• providing more incentives for consumers to choose electric when they replace vehicles and expanding charging infrastructure;
• advancing energy-efficient retrofitting of 9,000 existing buildings and helping consumers electrify their homes by switching to heat pumps, electric water heaters, and electric appliances; and
• electrifying school buses, transit buses, and government fleet vehicles.

As part of the plan, MDE has committed to explore an economy-wide cap-and-invest program “to complement targeted investments and sectoral standards, while providing a sustainable revenue source for state-funded community investments.” The program would aim to drive investments in energy infrastructure that enable reductions in climate pollution, to place a declining cap on such pollution, and to auction emissions allowances to raise proceeds to support program-related goals. The program could prioritize investments in disproportionately impacted communities. Further, it could provide resources to make the transition affordable for businesses and households.

This report outlines options for the design of such an economy-wide cap-and-invest program. We draw on both policy science literature and experience in existing emissions markets. Market-based mechanisms that place a price on emissions are an effective tool to incentivize cost-effective emissions reductions because they give private parties the flexibility to reduce emissions where it is least expensive to do so. An emissions cap boosts confidence that the climate plan goals, and the overall emissions reduction target, will be achieved. Adding the investment framework can provide incentives to leverage federal and private funds to achieve the goals and place equity for small businesses and low- and moderate-income households at the front of the energy transformation. However, in designing this emissions cap-and-invest program, policymakers face many decisions that will influence its fairness, effectiveness, and enforceability.