2. TRANSPORTATION
Tradeable performance standards represent a promising tool in the transportation sector SONIA YEH, DALLAS BURTRAW, THOMAS STERNER, AND DAVID GREENE
New research as part of the Mistra Carbon Exit project has revealed the effectiveness of credit trading for several programs that were designed to promote the advancement of clean technologies in the transportation sector. As global temperatures continue to rise, policymakers are working to find ways to promote technology development and cut emissions in the transportation sector, which is responsible for 24 percent of direct CO2 emissions from fuel combustion. Four different performance programs examined and compared A performance standard is a policy that promotes innovation by setting a performance goal (such as fuel economy standards) without specifying how it should be achieved. Rather than requiring every company to reach this goal, a tradeable standard allows companies to over-perform and sell credits to companies that incur higher costs for reaching the goals, thereby making the policy more flexible and costeffective. We have examined four tradeable performance standard (TPS) programs and policies in the US transportation sector: regulations for vehicle greenhouse gas emissions, the statelevel Zero Emission Vehicle Program, the Renewable Fuel Standard, and California’s Low Carbon Fuel Standard.
Politically attractive and successful Carbon pricing through taxes or tradeable permits is generally considered to be the overall superior instrument. However, in circumstances in which carbon pricing (at a sufficiently high level) is not feasible politically, TPS programs offer a very attractive alternative. TPS programs have been prominent in the US electricity sector, exemplified in 29 states’ renewable portfolio standards and in the Obama Administration’s proposed Clean Power Plan. Recently, China announced its intent to implement the largest rate-based emissions trading program in the world for its electricity sector. Even in the EU and in Sweden, we see political limits to carbon pricing. To resolve this, TPS could be applied more broadly to various sectors (e.g., industry), especially where significant cost heterogeneity exists. Sweden is already increasingly using a Performance Standard approach (Reduktionsplikten) for the transport sectors. Policymakers might consider increasing the tradeability feature to make this a TPS. They might also consider coupling in a more-systematic way TPS with carbon pricing, to foster greater technology innovation.
We have made the following observations: • Performance standards set policy targets while leaving technology choices to producers. • Since their implementation, TPS programs have provided billions of US dollars in the form of credits to companies that perform at levels above the standards. • Compared with carbon pricing programs, existing TPS programs contain greater incentives for technology switching and innovations but have lower price impacts and, therefore, weaker incentives to reduce consumption. • TPS combines effectively with carbon pricing to foster innovation and economic transition.
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Literature Goulder, L. H., and R. D. Morgenstern. 2018. China’s Rate-Based Approach To Reducing CO2 Emissions: Attractions, Limitations, and Alternatives. AEA Papers and Proceedings 108: 458–62. Meckling, J., Sterner, T., & Wagner, G. (2017). Policy sequencing toward decarbonization. Nature Energy, 2(12), 918–922. Yeh, S., Burtraw, D., Greene, D. L., & Sterner, T. (2020). Tradable performance standard as a hybrid regulatory-market policy instrument: case studies in transport. Resources for the Future working paper.
