Interpreting Tradable Credit Prices in Overlapping Vehicle Regulations

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.

This study examines the effects of these overlapping regulations on manufacturer behavior and infers the resulting relationship between credit prices and the costs of emission reductions.

Key Findings

• When environmental regulations with tradable crediting provisions overlap, simple interpretations of credit prices no longer hold.
• Marginal costs of reducing GHGs from gasoline vehicles are nearly equal to the sum of CAFE and GHG credit prices.
• Marginal costs of selling one additional ZEV are substantially higher than the ZEV credit price. This difference is due to the cost savings in compliance with the federal GHG and CAFE rules when manufacturers produce and sell another ZEV.

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Prices of tradable credits in environmental regulations reveal information about abatement costs. This information guides regulatory assessments and future changes to the regulations. When regulations overlap, however, simple interpretations of credit prices no longer hold. We derive formulas for interpreting the value of credit prices for three overlapping regulations for passenger vehicles: corporate average fuel economy (CAFE) standards, greenhouse gas (GHG) standards, and zero emissions vehicle (ZEV) programs. Our assessment reveals that the marginal costs of reducing GHGs from conventional gasoline vehicles are virtually equal to the sum of CAFE and GHG credit prices, since each policy regulates emissions/fuel use in nearly the same way. We calculate that marginal costs ranged between $8 and $16 per ton of carbon in 2017. In contrast, marginal costs of selling one additional ZEV were $6,000 to $11,000 in 2017, which are higher than the ZEV credit price. This difference is due to the compliance value of selling a ZEV achieved under the CAFE and GHG programs.