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New Markets for Credit Trading Under U.S. Automobile Greenhouse Gas and Fuel Economy Standards

Author

Listed:
  • Benjamin Leard
  • Virginia McConnell
Abstract
Recent changes to U.S. Corporate Average Fuel Economy (CAFE) regulations that allow for credit banking and trading have created new opportunities for lowering the cost of meeting strict new standards. For the first time, automakers will be able to trade credits between their own car and truck fleets and across manufacturers and bank credits over longer time periods. The potential to lower the costs of the regulations could be large if well-functioning credit markets develop. Starting in 2012, new regulations for greenhouse gas (GHG) emissions overlap with the CAFE standards, creating two separate regulations and two separate credit markets, one for fuel economy and one for greenhouse gases. We find that although the two regulations are supposed to be harmonized, there are important differences in how credits are defined and can be traded, increasing costs for manufacturers. We review evidence on how well the credit markets are working and assess how the following may interfere with well-functioning markets: overlapping regulations, reductions that are not additional, lack of price transparency, and use of monopoly power. We find that although trading volumes have been increasing, these markets could be more efficient in lowering GHG emissions and fuel use.

Suggested Citation

  • Benjamin Leard & Virginia McConnell, 2017. "New Markets for Credit Trading Under U.S. Automobile Greenhouse Gas and Fuel Economy Standards," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(2), pages 207-226.
    • Handle: RePEc:oup:renvpo:v:11:y:2017:i:2:p:207-226.
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    File URL: http://hdl.handle.net/10.1093/reep/rex010
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    Citations

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    Cited by:

    1. Kellogg, Ryan, 2020. "Output and attribute-based carbon regulation under uncertainty," Journal of Public Economics, Elsevier, vol. 190(C).
    2. Linn, Joshua & McConnell, Virginia, 2019. "Interactions between federal and state policies for reducing vehicle emissions," Energy Policy, Elsevier, vol. 126(C), pages 507-517.
    3. Dou, Xiaoya & Linn, Joshua, 2020. "How do US passenger vehicle fuel economy standards affect new vehicle purchases?," Journal of Environmental Economics and Management, Elsevier, vol. 102(C).
    4. Richard Schmalensee & Robert N. Stavins, 2019. "Policy Evolution under the Clean Air Act," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 27-50, Fall.
    5. Yeh, Sonia & Burtraw, Dallas & Sterner, Thomas & Greene, David, 2021. "Tradable performance standards in the transportation sector," Energy Economics, Elsevier, vol. 102(C).
    6. Leard, Benjamin & Linn, Joshua & Springel, Katalin, 2019. "Pass-Through and Welfare Effects of Regulations that Affect Product Attributes," RFF Working Paper Series 19-07, Resources for the Future.
    7. Galvin, Ray, 2020. "Who co-opted our energy efficiency gains? A sociology of macro-level rebound effects and US car makers," Energy Policy, Elsevier, vol. 142(C).
    8. Lucas W. Davis & James M. Sallee, 2020. "Should Electric Vehicle Drivers Pay a Mileage Tax?," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 65-94.
    9. Greene, David L. & Welch, Jilleah G., 2018. "Impacts of fuel economy improvements on the distribution of income in the U.S," Energy Policy, Elsevier, vol. 122(C), pages 528-541.
    10. Rhodes, Ekaterina & Scott, William A. & Jaccard, Mark, 2021. "Designing flexible regulations to mitigate climate change: A cross-country comparative policy analysis," Energy Policy, Elsevier, vol. 156(C).
    11. Wang, Banban & Pizer, William A. & Munnings, Clayton, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    12. Leard, Benjamin & Linn, Joshua & Springel, Katalin, 2020. "Have US Fuel Economy and Greenhouse Gas Emissions Standards Improved Social Welfare?," RFF Working Paper Series 20-06, Resources for the Future.
    13. Leard, Benjamin & Linn, Joshua & Springel, Katalin, 2023. "Vehicle Attribute Tradeoffs and the Distributional Effects of US Fuel Economy and Greenhouse Gas Emissions Standards," RFF Working Paper Series 23-04, Resources for the Future.
    14. Leard, Benjamin & McConnell, Virginia, 2021. "Interpreting tradable credit prices in overlapping vehicle regulations," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    15. Wang, Yiwei & Miao, Qing, 2021. "The impact of the corporate average fuel economy standards on technological changes in automobile fuel efficiency," Resource and Energy Economics, Elsevier, vol. 63(C).

    More about this item

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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