Carbon Policy under the Clean Air Act: Examining Tradable Standards

Feb 15, 2012

Carbon Policy under the Clean Air Act: Examining Tradable Standards
RFF Feature
February 15, 2012

Billowing nuclear stacks
For the near and foreseeable future, climate policy in the United States is in the hands of the Environmental Protection Agency and the states. Under the Clean Air Act, EPA has committed to issuing, in 2012, what will be the first nationwide regulations on greenhouse gas emissions from existing sources: performance standards under Section 111 of the act for coal plants and petroleum refineries. The agency will soon need to make important decisions about these regulations, including, above all, what kind of policy tool to use.

For existing sources, Section 111 appears to allow flexible, market-based regulatory tools. In a new discussion paper, RFF experts Dallas Burtraw, Arthur Fraas, and Nathan Richardson describe one such tool—tradable standards. These differ from the more familiar cap-and-trade approach because they impose no limit on emissions. In economic terms, however, they are similar to cap and trade; evidence suggests tradable standards are substantially more cost-effective than traditional, inflexible performance standards.

The paper provides an introduction to the use of tradable standards, focused on the electricity sector. The authors also address implementation issues, including the geographic and sectoral scope of the program, banking of credits, phased implementation and the role of states.