Working Paper

GHG Cap-and-Trade: Implications for Effective and Efficient Climate Policy In Oregon

Nov 21, 2018 | Todd Schatzki, Robert N. Stavins

Summary

As Oregon contemplates the adoption of a GHG cap-and-trade system, it has several options for its suite of climate policies.

Key Findings

  • With adoption of state-level carbon cap-and-trade, pre-existing overlapping policies may have limited (or no) environmental effectiveness, while raising costs.
  • Options include keeping all pre-existing policies, despite higher economic costs; immediately eliminating pre-existing policies, creating economic gains; or gradually transitioning away from the pre-existing policies toward priced-based regulation.
  • A gradual transition can enable public and political acceptance of carbon prices.
  • Empirical analysis of the overlap between California’s cap-and-trade and a low-carbon fuel standard shows that the low-carbon fuel standard increases GHG emissions, while raising costs substantially.

Overview

Within the United States, climate policy is increasingly shifting to individual states, given the gap in federal leadership. As states develop their climate policies, they increasingly pursue a suite of policies, some of which target the same sources through multiple overlapping measures. The implications of such a “belts and suspenders” approach for environmental and economic outcomes depends on several important factors, notably the extent to which policies target distinct market failures, and the interactions between overlapping policies. As policymakers add new policies to the mix, these interactions can have implications for the efficacy of the pre-existing policies. Policies that previously created environmental benefits may no longer do so, and eliminating the policy may lower costs. Policymakers are left with several choices: keep all of the policies, despite the potential economic inefficiencies; immediately eliminate pre-existing policies; or gradually transition from to set of policies that achieves the same environmental objectives at lower economic cost. We analyze these issues in the context of the State of Oregon’s decision to adopt a greenhouse gas (GHG) cap-and-trade program incremental to existing policies that include a low-carbon fuel standard and renewable portfolio standards. To illustrate these interactions, we analyze the overlap between cap-and-trade and a low-carbon fuel standard for California. We find that costs of the low-carbon fuel standard are substantially higher than cap-and-trade and interactions between the programs increases GHG emissions (compared to cap-and-trade only).