Lessons from the Literature for State Carbon Pricing Policy Design

In the US, many states have adopted ambitious decarbonization goals for the decades to come. For example, Hawaii, New York, and Maine have set targets to reduce state-wide greenhouse gas emissions by 100 percent in the coming decades. In many cases, states have not yet implemented policies that will ultimately achieve these ambitious goals. As states look to do so, many may consider adopting some form of a carbon pricing policy, a tool typically recognized by economists as the most efficient for achieving emissions reductions, as part of a collection of policies to meet state goals.This literature review offers a comprehensive overview of carbon pricing policy design. It draws on literature from existing carbon pricing programs, simulation modeling for proposed programs, theoretical concepts, and descriptive analyses. It is intended to guide policymakers in establishing carbon pricing programs as well as to identify gaps in the research and suggest next steps. The literature review offers the following key takeaways:Mitigating Leakage: Carbon pricing policies can create emissions and economic leakage, but policy design options (like a border carbon adjustment or output-based allocation) can be used to mitigate those.Designing for Policy Interactions: Carbon pricing policies should be designed to work well with other policies to overcome the waterbed effect. One option is price-responsive supply.Addressing Distributional Concerns: Using revenues in the form of tax breaks or dividends to households can reduce the regressivity of carbon pricing.Garnering Political Support: Policies that address other local concerns such as air quality or improve social inequities can improve political support.Improving Policy Durability: Policy sequencing can also be used to build policy support and accelerate technological development.Viable Alternatives: When carbon pricing is not possible, other pricing policies (such as tradable performance standards) can achieve nearly as efficient outcomes. Many of these other policies can also work well with carbon prices.