Cap-And-Trade Could Be Cheaper Than Power Plant And Car Regulations, Study Finds

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According to a new study, a price on carbon could be easier to attain economically than previously thought.

The study, authored by two MIT researchers and published in Energy Journal, compared “traditional regulatory approaches” to cut carbon, such as a country-wide clean energy standard and a fuel economy standard for new vehicles, with a cap-and-trade system that set a price on carbon. The researchers found that there were significant cost differences between approaches that aimed to limit emissions from one sector — such as electricity or transportation — and approaches that aimed to broadly cut emissions from all sectors. They looked at cost differences across different U.S. regions, sectors and income classes, and found that, if emissions-reducing regulations on the electricity sector and a fuel-economy standard were implemented, the two combined would cost more than a single cap and trade system.

The cap-and-trade system, which in the study would aim to reduce overall emissions from 2012 through 2050 to 50 percent below 2005 levels, would also result in better emissions reductions, the researchers found.

“With a broader policy, like cap-and-trade, the market can distribute the costs across sectors, technologies and time horizons, and find the cheapest solutions,” study co-author Valerie Karplus, member of the MIT Joint Program on the Science and Policy of Global Change, said in a release. “So the market encourages emissions reductions from sectors like electricity and agriculture, and requires reductions from vehicles and electricity at a level that makes economic sense given an emissions target. On the other hand, narrow regulations force cuts in ways that are potentially more costly and less effective in reducing emissions.”

The study also looked at a scenario where regulations aimed at the power and transportation sector were coupled with a cap-and-trade system. Based on the findings that cap-and-trade could actually be cheaper than implementing a clean energy standard coupled with fuel efficiency standards, the implementation of a cap-and-trade to go along with the EPA’s recent carbon rule may not be out of the question for the United States.

U.S. emissions under different regulatory scenarios.

U.S. emissions under different regulatory scenarios.


The study did not look specifically at the Environmental Protection Agency’s new carbon rule, which aims to reduce carbon emissions from power plants 30 percent by 2030, compared to 2005 levels (though each state has its own emissions reductions goals). Instead, one of the six scenarios considered was a “federal renewable portfolio standard for electricity which mandates that 20% by 2020, 30% by 2030, 40% by 2040, and 50% by 2050 has to be produced from renewable energy (including hydropower), and that all new coal power plants capture and store more than 90% of their CO2 emissions.” Another was a federal fuel economy policy that established an efficiency increase for new cars that started in 2012 and eventually increased to three times 2005 efficiency levels. By comparison, the U.S.’s Corporate Average Fuel Economy (CAFE) standards, introduced in 2012, will increase the average fuel efficiency of new cars and light trucks to 54.5 miles per gallon by 2025.

The added costs to a scenario of fuel economy standards coupled with regulations on power plants come partly from the technology needed to make cars and trucks more efficient, the researchers said. They said there’s also less of an incentive to save fuel with these coupled regulations — under a price-setting cap and trade system, consumers would be more pressed to drive less.

For lower-income Americans, a cap-and-trade policy might also be as good as, or better than, a scenario that combines fuel standards with power plant regulations, according to the report. Though as Climate Progress has previously pointed out, the EPA’s new power plant rule is not going to make the poor poorer — a claim that’s been thrown around by opponents of the rule — the study states that fuel economy and cap–and–trade policies are “moderately progressive,” meaning they also won’t overly burden the poor.

The researchers acknowledge that cap-and-trade is likely more difficult to pass politically in the U.S. than other regulations. Even so, a few weeks after the EPA’s carbon rule was released, it’s facing legislation that, if passed, would nullify it.

“Unfortunately, the most efficient policies are not the most politically feasible,” Karplus said. “Even though a cap-and-trade system would cost less, the costs are very visible to businesses and consumers. The higher price tag of the sectoral policies is also more concentrated and often goes unnoticed by the broader public. So the high costs of our current policies haven’t been obvious enough to remove the political obstacles to implementing a more efficient approach.”

Still, the study shows that adopting a program that puts a price on carbon may not be out of the question for the U.S., especially as the country meets the EPA rule’s 2020 pollution target of an estimated 25 percent below 2005 levels. President Obama endorsed the idea of a price on carbon in the latest episode of Showtime’s Years of Living Dangerously on Sunday.

“The way we’ve solved previous pollution problems like acid rain was we said, ‘we’re gonna charge you if you’re releasing this stuff into the atmosphere. We’re gonna let you figure it out, but we’re gonna to tell you that you can’t keep dumping it out in the atmosphere and making everybody else pay for it,'” Obama said. “‘So if there is one thing I would like to see, it’d be for us to be able to price the cost of carbon emissions.'”