New Markets for Pollution and Energy Efficiency: Credit Trading Under Automobile Greenhouse Gas and Fuel Economy Standards
Resources for the Future Discussion Paper 15-16
37 Pages Posted: 26 Jun 2015
Date Written: May 18, 2015
Recent changes to the Corporate Average Fuel Economy (CAFE) standards have created new opportunities for lowering the cost of meeting strict new standards through provisions for credit banking and trading. In this paper, we explore these new markets for reductions in both fuel consumption (fuel economy) and greenhouse gases (GHGs). We examine the two separate credits markets for fuel economy as regulated by NHTSA and for GHG gases under EPA and find that there are some important differences between them. For example, the market for NHTSA fuel economy credits has an effective credit price ceiling while the market for EPA GHG credits does not. We then evaluate the functionality of these markets using publicly available data on credit holdings and trades through 2013. Finally, we assess the potential for the following to interfere with well-functioning markets: overlapping regulations, lack of additionality, thin markets, and use of monopoly power. We find that features of robust trading markets are missing in these early years, and suggest reasons why. We also explore the implications of the fact that the two regulations are almost fully overlapping.
Keywords: credits, pollution markets, CAFE rules, GHG reductions
JEL Classification: Q48, Q52, Q58, R48
Suggested Citation: Suggested Citation