Regulatory control of vehicle and power plant emissions: how effective and at what cost?

Passenger vehicles and power plants are major sources of GHG emissions. While economic analyses generally indicate that a broader market-based approach to GHG reduction would be less costly and more effective, regulatory approaches have found greater political success. We evaluate a global regulatory regime that replaces coal with natural gas in the electricity sector and imposes technically achievable improvements in the efficiency of personal transport vehicles. Its performance and cost are compared with other scenarios of future policy development including a no-policy world, achievements under the Copenhagen Accord, and a price-based policy to reduce global emissions by 50% by 2050. The assumed regulations applied globally achieve a global emissions reduction larger than projected for the Copenhagen agreements, but they do not prevent global GHG emissions from continuing to grow. The reduction in emissions is achieved at a high cost compared to a price-based policy. Diagnosis of the reasons for the limited yet high-cost performance reveals influences including the partial coverage of emitting sectors, small or no influence on the demand for emissions-intensive products, leakage when a reduction in fossil use in the covered sectors lowers the price to others, and the partial coverage of GHGs. If these regulatory measures are in part correcting other barriers or behavioural limitations consumers face, the benefits of overcoming these could offset at least some of the costs we estimate. The extent of any efficiency gap - the difference between engineering estimates of best practice and what actually happens - is highly contested, and offers an important avenue for future research. Policy relevance While analysts concerned with national cost of GHG control have long advocated a GHG pricing policy, by a cap-and-trade system or a tax, covering all emissions sources and gases, governments more often pursue sectoral policies and technology standards. Given these political realities, the regulations represent a more politically practical approach to GHG reductions, focusing on solutions that are within reach and that do not depend on technological breakthroughs. If regulations are imposed as a way to get started on larger emissions reductions, and then combined with a broader GHG pricing policy pursuing a deep global cut in emissions, its requirements will eventually be overtaken by the pricing policy. The remaining higher costs of the regulatory targets become diluted so that in later years the difference in average cost per ton between a least-cost approach and one preceded by a period of regulatory action becomes very small.