Should California Include Motor Vehicle Fuels in a Greenhouse Gas Cap-and-Trade Program?

Abstract:     
This paper considers whether the California Air Resources Board, in implementing regulations to achieve the greenhouse gas reduction goals of the AB32 legislation, should include motor vehicle fuels as part of a cap-and-trade program. Its conclusion is that it is of importance to do so. While this may be relatively uncontroversial on the grounds of first-best economic principles, there are numerous political, administrative and second-best economic reasons that suggest other courses may be preferred. These reasons include compliance and enforcement concerns, the existence of other regulatory programs for the transportation sector, belief that efficiency gains from inclusion would be small, jurisdictional linkage issues, and both political skepticism and agency inexperience with broad market-based regulation. However, consideration of most of these factors strengthens the conclusion. Additionally, a cap-and-trade market with motor vehicle fuels included is necessary to create an important economic competition between the electricity sector and the motor vehicle fuels sector, in which they (and others) vie to see which can most successfully replace ordinary gasoline and diesel with much greener sources. The overall program will be more effective, efficient and equitable with motor vehicle fuels included as part of the cap-and-trade component.

Keywords: climate change, cap-and-trade program, environmental regulation, emissions trading, transportation, electricity, greenhouse gases, carbon emissions markets

JEL Classifications: L51, L98, Q54, Q58, H23

Working Paper Series