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How Regulatory Standards Can Affect a Cap-and-Trade Program for Greenhouse Gases 1 (September 2009)

handle is hein.congrec/cbo8867 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office SEPTEMBER 16, 2009 How Regulatory Standards Can Affect a Cap-and-Trade Program for Greenhouse Gases Some legislation considered by the current and previous Congresses has proposed combining cap-and-trade programs with various regulatory standards to reduce greenhouse-gas emissions. Greenhouse gases increase the amount of energy temporarily held in the lower atmo- sphere, keeping the Earth's surface warmer than it would otherwise be. Such gases include carbon dioxide, meth- ane, nitrous oxide, and several compounds that contain fluorine and chlorine.1 Cap-and-trade programs would place explicit restrictions on annual emissions, and pro- ducers whose activities generate greenhouse gases would be required to hold permits, called allowances, to con- tinue to produce those emissions. The allowances would have economic value, and they would be tradable among companies and by individual people. Some regulatory standards already exist and others have been proposed that also would affect emissions of green- house gases. In some cases, regulatory standards would require producers of greenhouse gases to use specific tech- nologies, such as renewable sources for generating elec- tricity; in others, manufacturers would have to modify the performance of their products, such as commercial furnaces, to use energy more efficiently. Such regulatory standards have been used in the past to meet various envi- ronmental goals. The Environmental Protection Agency, for example, requires some manufacturing plants to use hoods, scrubbers, or other means to capture and filter air pollutants. Similarly, the nation's corporate average fuel economy (CAFE) standards specify miles-per-gallon tar- gets for cars and trucks, although the standards do not specify how automakers should achieve those goals. Some regulatory standards have been coupled with financial incentives to encourage the use of specific technologies or to promote particular industries. For example, current law requires certain fuel refiners, importers, and blenders to gradually increase the amount of ethanol blended into gasoline, and the government provides tax credits for each gallon of blended fuel sold. Over the past two decades, policymakers have established cap-and-trade (see Box 1) and other market-based programs because such programs often provide a more efficient way to reduce pollution than is possible through the imposition of regulatory standards alone. Market- based approaches rely on the interaction between produc- ers and consumers to determine how to meet specific tar- gets for emissions. Because policymakers do not always have enough information to tailor national regulatory standards to local circumstances, for example, or to adjust standards rapidly as market conditions change, regulatory standards do not always ensure that the least expensive solution is brought to bear on an environmental problem. Market-based approaches, in contrast, allow flexibility in the approach to meeting an environmental goal and often can achieve the same result at a lower cost. As a result, regulatory standards combined with market- based approaches often will increase the cost of meeting an environmental goal. In particular, if standards forced large reductions in emissions in a specific industry or for a particular product that would not result from a cap- and-trade program alone, the standards would reduce the demand for allowances and depress market prices for them. Some lower-cost strategies would then not be pur- sued because producers would have no incentive to adopt them. The target for emission reductions might be met, but the technology or performance standard might have substituted higher-cost for lower-cost reductions that would have occurred as a result of the cap-and-trade program without the additional standards. 1. See Congressional Budget Office, Potenti Change in the United States (May 2009).

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