Interpreting Tradable Credit Prices in Overlapping Vehicle Regulations

The rapid transformation of the US transportation sector is partly due to three policies that aim to reduce greenhouse gas emissions from light duty vehicles: the federal corporate average fuel economy (CAFE) and greenhouse gas (GHG) standards and the state-level zero-emissions vehicle (ZEV) mandates. Each policy includes a credit-trading program to reduce compliance costs for manufacturers and to allow flexibility for meeting the separate requirements. The prices of these credits can indicate the cost of reducing GHG emissions, either through fuel economy improvements or the sale of zero-emissions vehicles.This study examines the effects of these overlapping regulations on manufacturer behavior and infers the resulting relationship between credit prices and the costs of emission reductions.Key FindingsWhen environmental regulations with tradable crediting provisions overlap, simple interpretations of credit prices no longer hold.Marginal costs of reducing GHGs from gasoline vehicles are nearly equal to the sum of CAFE and GHG credit prices.Marginal costs of selling one additional ZEV are substantially higher than the ZEV credit price. This difference is due to the cost savings in compliance with the federal GHG and CAFE rules when manufacturers produce and sell another ZEV.Click below to download the original version of this revised paper.