Federal climate policy is the set of actions taken by the US federal government to address and mitigate the effects of climate change. Climate policy includes policies to mitigate climate change (reducing greenhouse gas emissions and removing greenhouse gases from the atmosphere, so that the climate does not change as much or as quickly); and to adapt to climate change (helping communities and businesses to build resilience and avoid the worst effects of warmer temperatures, extreme weather, and other impacts).
This explainer focuses on policies aimed at reducing the amount of greenhouse gases in the atmosphere in order to reduce the increase in the overall temperature of the planet and resulting impacts. It lays out the primary policy instruments—in general terms—that can be used to achieve this goal, and describes how such policies can be evaluated, including a set of criteria that can help to determine how effective, efficient, and equitable a policy is in achieving its climate goals.
Federal Climate Policy Toolkit
This explainer introduces RFF’s Federal Climate Policy Toolkit, which describes in detail the policy tools the US federal government can use to reduce emissions and atmospheric concentrations of greenhouse gases. Upcoming topics in the series include policy tools for the power sector, the transportation sector, the industrial sector, and more.
Tools in the Climate Policy Toolkit
The United States is responsible for emitting billions of metric tons of greenhouse gases into the atmosphere every year (6.5 billion metric tons of carbon dioxide-equivalent in 2019). Figure 1 shows the breakdown of where these emissions come from by economic sector.
Figure 1. 2019 US Greenhouse Gas Emissions by Sector
The major greenhouse gas reduction policy approaches under consideration fall into three main categories: carbon pricing, technology subsidies, and performance standards. Carbon pricing policies provide a direct financial incentive to reduce emissions, and they can be implemented through a tax or fee (e.g., in dollars per ton), or through the establishment of a market-based cap-and-trade system. Technology and innovation subsidies provide incentives for low-emission technology deployment and innovation and can be implemented through tax credits (e.g., cents per kilowatt-hour) or direct public funding. Performance standards require specific products or processes to meet certain minimum or average levels of technical performance (e.g., tons of carbon dioxide per kilowatt-hour, miles per gallon) and can range from being flexible, broad, and market-based, to being prescriptive and site-specific. Procurement policies, international agreements, and a wide array of other programs also play important roles in a comprehensive climate policy portfolio.
One of the most important attributes of individual climate policies is whether they are principally economic incentive-based, employing market forces to reduce emissions, or prescriptive regulatory approaches that rely on highly-specified regulatory requirements that must be met to avoid penalties. As explained further here and in subsequent explainers, many policies—particularly various forms of performance standards—fall on a continuum depending on the degree of flexibility they allow across firms, locations, and technologies in achieving specified mandates. These different policy approaches are also not mutually exclusive; in many cases, they can be and are used in combination.
Carbon Pricing Policies
Carbon pricing policies require companies to pay a price for each ton of carbon emissions they release. This price, which generally escalates over time, changes the relative cost of fuels and products, increasing the price of high-emitting fuels and products relative to those with lower emissions.
A carbon price has several advantages relative to other climate policy options:
- It is comprehensive and percolates through the entire economy, providing an incentive for all decisionmakers to look for ways to reduce emissions (for example, by improving the boiler in a factory or buying a more efficient air conditioner at home).
- It provides business and households with the flexibility to make decisions that make sense based on their own information.
- Existing markets can seamlessly incorporate the value of reducing emissions in the prices of all goods and services.
- Explicit carbon pricing policies have faced significant political headwinds in the US Congress.
Performance standards are a broad set of policies that set benchmarks that firms must meet. They can be applied in many different economic sectors. For instance, they might set an emissions benchmark for power generators; a benchmark for how much energy must come from low-carbon energy sources (a clean energy standard); or a benchmark for fuel economy for new cars (miles-per-gallon standards). Examples of performance standards include clean electricity standards and renewable portfolio standards in the power sector; fuel economy standards, renewable fuel standards, low-carbon fuel standards, and zero-emission vehicle standards in the transportation sector; emissions performance standards in the industrial sector; and appliance efficiency standards and building codes in the commercial and residential sectors.
Performance standards can be designed with widely varying degrees of flexibility and tradability across firms. On the most prescriptive end of the continuum are technology standards, which require firms and facilities to install and use specific types of technologies in order to reduce emissions. A good example of this prescriptive type of standard can be found in the US Environmental Protection Agency’s “New Source Review” requirements for the construction of new or significantly upgraded power plants. In order to be granted a permit, these plants must include plans to install “Best Available Control Technology” for mitigating conventional air pollutant emissions.
More flexible performance standards generally do not dictate what technologies a firm should use to meet established benchmarks, instead allowing firms to do so in the most cost-effective ways they can. These policies typically consider a broad range of technologies as compliance options, sparking industry creativity with respect to how they meet the targets at lowest cost. Such standards may establish different benchmarks at the facility or firm level, or offer flexibility to meet benchmarks across a substantial portion of the economy through tradability. For example, clean electricity standards have been proposed that set targets for an increasing share of overall electricity sales to come from clean power, which would give rise to a national market for clean power credits.
Performance standards have the effect of increasing the cost of low-performing technologies (such as a car with higher greenhouse gas emissions) relative to higher-performing ones. Compared with carbon pricing policies, performance standards have less impact on consumer prices but also lead to more expensive emissions reductions. Performance standards can be effective in combination with carbon pricing policies or alone, and when designed carefully can have a high degree of cost-effectiveness within a given sector.
Technology Deployment Subsidies
Most technology deployment subsidies in the United States have taken the form of tax credits; other approaches include direct payments, loan guarantees, reverse auctions, feed-in-tariffs, and contracts for differences.
Tax credits provide a financial incentive encouraging a particular economic activity through the reduction of tax payments. The goal of tax incentives in the clean energy context is to give financial incentives to companies and households to build, produce, or consume technologies and products that have low or zero emissions. For instance, a tax incentive might encourage people to buy electric vehicles rather than gasoline vehicles, encourage investment in and production of electric power from solar, wind, and other renewable power sources, or support the capture and underground storage of carbon dioxide.
Tax credits have been employed for years at the federal level. Examples include the federal tax credit for electric vehicles and the Production Tax Credit and Investment Tax Credit for wind and solar power, which reduce the cost of building and deploying these technologies. These tax credits have helped spur considerable private investment in initial deployment and cost-reducing innovation of these technologies, pointing to one of the key benefits of tax incentives. At the same time, tax incentives are generally regarded as a relatively cost-ineffective way of driving emissions reductions over the long term, in part because they can require large amounts of public spending when deployment scales up.
Public Funding for Innovation
Investing in research and development of advanced clean energy and emissions reduction technologies is a critical element of climate mitigation policy. Because the private sector often underinvests in long-term research, the federal government can—and often does—play a key role in providing foundational funding for research and development of emerging technologies. The federal government can increase funding for this activity as a strategy for addressing climate change.
The government recently authorized billions of dollars of additional federal funding for clean energy research, development, and deployment via the Energy Act of 2020, which focuses on fostering energy innovation by modernizing US energy policies. The act establishes research and development programs for energy storage technology, hydrogen, carbon capture, and more.
Public procurement of goods makes up a sizable portion of the US and global economies (12 percent globally, by World Bank estimates). By establishing “green procurement” policies and programs, policymakers can encourage or require government agencies to purchase relatively sustainable goods, from structural building materials, such steel and cement, to vehicles and office equipment. Given the size of the federal government, procurement at the federal scale can drive innovation investments, creating or bolstering markets for advanced technologies and high-performance products that would otherwise be less competitive. By establishing a “demand-pull” for the development of emerging technologies, government procurement creates a customer base and reduces the risk associated with investing in advanced energy technologies and other emissions-reduction techniques.
The Paris Agreement on climate change is a legally binding agreement, meaning that the countries who join must pursue significant efforts towards keeping global warming below 2 degrees Celsius. The international popularity of the Paris Agreement can in large part be attributed to its flexibility: individual countries establish their own targets, while being held accountable to amplify their goals overtime. The Paris Agreement and other international agreements are important policy tools for contributing to multi-national climate strategies and for leveraging reciprocal action by other countries so that overall global emissions are brought down.
Cross-Cutting Criteria for Policy Evaluation
How can decisionmakers decide among the tools described above in crafting climate policy, given the wide range of options available to them? The sections below describe a number of criteria that can be considered when evaluating climate policy strategies.
Effectiveness in Achieving Emissions Reductions
A clear and obvious criterion for evaluating climate policy is the amount of emissions reductions achieved. If a policy does not lead to emissions reductions—or worse, if it leads to increased emissions—then it is not an effective climate mitigation policy. The pace and cumulative quantity of reductions over time is critical as well; for instance, a policy leading to a small amount of reductions initially may lead to greater reductions later (through innovation, for example), having an overall significant effect.
The cost-effectiveness of a climate policy quantifies how much the emissions reductions generated by the policy cost, per unit of reduction: it is typically measured in dollars per ton of carbon dioxide (or other greenhouse gas). For instance, if one policy costs $10 to reduce emissions by 1 ton and another policy costs $100 to reduce emissions by 1 ton, the first policy is more cost-effective. Cost-effectiveness is very important to consider, both because more cost-effective policies lead to a stronger economy (because they don’t waste resources), and because more cost-effective polices can achieve more ambitious emissions reductions for a given amount of resources spent.
Benefits and Costs
When evaluating climate policy approaches, the overall benefits and costs of the policy to society are also important to consider. In estimating the potential or actual benefits of a policy, several factors are critical, including the social cost of carbon and the co-benefits of the policy.
The social cost of carbon (SCC): The SCC is a policy tool that enables decisionmakers to place a valuation on the benefits of a policy that reduces carbon dioxide emissions. It does so by measuring, in dollar terms, the damage caused by one ton of carbon dioxide emissions released into the atmosphere. (Similarly, the social costs of methane and nitrous oxide measure the benefits of reducing these other potent greenhouse gases.)
Co-benefits: Co-benefits are ways in which a policy helps society beyond its principal motivation or purpose. For instance, if a carbon price is implemented to reduce greenhouse gas emissions and mitigate climate change, it will also tend to reduce local air pollution. The benefits of reduced pollution, such as improved health outcomes for people breathing cleaner air, are co-benefits of the carbon pricing policy. Co-benefits are essentially a category of policy benefits, and it is important that they be considered in benefit-cost analysis.
Distributional Impacts and Equity
Policies have different effects on different subgroups of people, known as distributional impacts or equity considerations. Increasingly, concerns about the distributional impacts of polices on different individuals, groups, communities, and regions assume a central place in the climate policy conversation. The equity impacts of a policy—the relative impacts it has on low-income and non-white communities compared with higher-income and white communities—are important to consider in policy design and evaluation. Communities of color, low-income communities, and other environmental justice communities are most vulnerable both to the potential costs of policy and to the effects of a changing climate. In addition, many in these communities have not enjoyed the benefits of environmental improvements that have accrued elsewhere.
As the US economy shifts away from fossil fuels and toward clean energy sources, employment patterns are changing—and many workers and communities who depend on fossil fuel jobs have been negatively impacted. While measuring the employment-related impacts of any particular policy is challenging—as there tends to be both job losses in one place and gains in another—it is important that decisionmakers take steps to evaluate the effects of policies on existing jobs, workers, and communities. It is also important to consider whether, where, and how policies are likely to lead to job growth—and what complementary policies or programs might be needed to prepare people to fill those new roles.
Climate change is not a short-term problem; to avoid its worst impacts, long-term and durable change is necessary. As political administrations and elected officials shift over time, federal policy can change drastically. The durability of law—in other words, the likelihood that regulations and statutes will remain robust as political power shifts—is a critical criterion on which to evaluate policy. Durable legislation and regulation provide more certainty to firms making important investment decisions, enabling a more consistent, stable environment in which to address climate change over the long term.
Driving Technological Innovation
Technological innovation is a crucially important element of a comprehensive climate policy strategy, both domestically and internationally. Deep emissions reductions will depend heavily on improvements in the availability, cost, and performance of technologies that can reduce emissions while meeting other needs across multiple sectors, including in electric power; transportation; industry and fuels; agriculture, forestry, and other land uses; and buildings. Innovation in carbon removal technologies (including direct air capture) is also necessary to compensate for hard-to-avoid emissions in a net-zero strategy, and to meet overall climate targets for limiting temperature rise.
International Competitiveness and Reciprocal Action
Maintaining and improving international competitiveness is important for the strength of the US economy and employment. Therefore, how US climate policy affects the ability of US companies to compete in world markets, the treatment of imports from other countries, and the climate actions of other countries, is an important consideration for the effectiveness of policy options. Domestic policy can be designed to leverage actions in other nations; for instance, border tax adjustments can level the playing field and increase the cost of carbon-intensive imported goods, encouraging other countries to make less carbon-intensive goods.
The US already has a number of emissions reductions policies in place at both the federal level (e.g., tax credits for wind, solar, carbon capture, and electric vehicles; automobile standards) and at the state level (e.g., renewable portfolio standards; cap-and-trade systems). New emission reduction policies introduced in the United States will therefore come into force in combination with policies already on the books. Understanding how policies interact, and where new and existing policies complement each other—meeting different goals, increasing ambition, or working on different margins in the economy—is an important consideration in designing a robust and cost-effective policy portfolio.
Federal policy to reduce greenhouse gas emissions can take many shapes, as outlined above. The policy options and considerations discussed here are critical for policymakers to take into account when designing policy. Beyond these factors, three additional observations can guide the climate policy conversation:
First, due to human activity (and fossil fuel use in particular), the climate is changing. Reducing net greenhouse gas emissions to zero is critical to halting global temperature increases and the resulting disruptions to the climate system.
Second, technology, policy, and markets each have important roles to play in climate mitigation. A technologically-inclusive approach to emissions reductions that embraces a wide range of options is both necessary and available.
Finally, technological advances have made clean energy and other emission reduction options more feasible and affordable, enabling the pursuit of ambitious climate action.
To successfully mitigate climate change, the policy options above must balance the needs of different sectors and communities, encourage businesses and individuals to choose low-emission options, and spur technological innovation.