Discussion Paper

Tradable Standards for Clean Air Act Carbon Policy

Abstract

EPA is in the process of regulating U.S. greenhouse gas (GHG) emissions using its powers under the Clean Air Act. The likely next phase of this regulatory program is performance standards under Section 111 of the act for coal plants and petroleum refineries, which the agency has committed to finalize by the end of 2012. Section 111 appears to allow use of flexible, market-based regulatory tools. In this paper, we discuss one such tool, tradable standards. Tradable standards appear to be a legally and politically viable choice for the agency, and evidence suggests they are substantially more cost-effective than traditional performance standards. The paper discusses implementation issues with tradable standards, including categorization, banking, and phased implementation, as well as broader issues with the Section 111 rulemaking process as it relates to state-level GHG regulatory efforts.

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. ​