Author: Samantha Klos

Introduction

Greenhouse gas pollution is a main contributor to climate change. Carbon dioxide and methane are examples of greenhouse gas pollutants, and human activities such as energy production and transportation emit them (see Figures 1 and 2). The Intergovernmental Panel on Climate Change (IPCC) has declared that global greenhouse gas emissions must be reduced by 50% by 2030 to prevent catastrophic and potentially irreversible effects of climate change. However, current emissions reductions by governments are not projected to meet that goal.

Corporations, governments, and consumers all contribute to greenhouse gas pollution. One study indicates 100 companies are responsible for 70% of greenhouse gas emissions. In addition, the United States is known to be the “the largest historical emitter” and currently has the second highest rate of greenhouse gas emissions in the world. Therefore, reducing the United States’ greenhouse gas emissions could have a significant impact on climate change.

Figure 1.Image courtesy of the EPA

Figure 2.Image courtesy of the EPA

Current State of Policies in the U.S.

In the United States, national policies regarding greenhouse gas pollution involve federal legislation like the Clean Air Act and international agreements such as the Paris Climate Accords. 

• Federal Policies: The Clean Air Act of 1970 is a landmark piece of legislation that called for the implementation of air quality standards. The law tasked the Environmental Protection Agency (EPA) with creating and enforcing limits on air emissions from both mobile and industrial sources. The law also gave regulatory power to individual states, giving them the authority to implement their own programs and monitor or report violators. These measures include the creation of National Ambient Air Quality Standards, State Implementation Plans, New Source Performance Standards, and National Emission Standards for Hazardous Air Pollutants. In 2007, the U.S. Supreme Court ruled that the definition of “air pollutants” includes greenhouse gasses, giving the EPA a stronger basis for arguing for the mitigation of climate change through pollutant regulation. The Energy Act of 2020 is another major federal law seeking to combat climate change through energy efficiency and innovation. Its main goals are to increase energy efficiency, modernize the energy grid, and advance research and development in renewable energy, nuclear energy, and carbon capture technologies. Specifically, it directs the Department of Energy to research and develop energy storage, nuclear, geothermal and carbon-capture technologies to advance a gradual shift away from fossil fuels.
• International Agreements: The Paris Agreement is an international accord that seeks to limit climate change to within 1.5°C. The agreement was adopted in 2015 by 197 countries, including the United States. Nations submitted emission reductions targets, or intended nationally determined contributions (INDCs), and these commitments are expected to strengthen overtime. For transparency and accountability purposes, the Paris Agreement keeps record of progress updates. While the Trump Administration withdrew the United States from the Paris Agreement, the Biden Administration rejoined and committed to reducing emissions “by 26 to 28 percent below 2005 levels by 2025.”
• State Policies: There are many non-federal policy options and proposals for greenhouse gas regulation. They include carbon pricing frameworks like carbon taxes or cap-and-trade programs, national or state-level renewable energy portfolio standards, energy resource efficiency standards, and tax credits for individual incentivization.

Arguments for Government Regulation of Greenhouse Gasses

The majority of US residents view climate change as a major threat and many have called for greater government involvement in tackling it. Although individuals are taking steps to reduce their emissions, a large proportion of emissions comes from corporations and industrial activity. Proponents of greenhouse gas regulations argue government involvement is necessary to reduce emissions because governments have the power to regulate companies in a way that individuals do not. For example, the government has the authority to impose carbon pricing frameworks, enforce emission reduction deadlines, and hold industries accountable for violations of clean air laws. 

The Build Back Better Act is the most significant proposition addressing climate change in American history. Energy efficiency projects, electric vehicles, and climate change research would all receive funding from the bill. In addition, the act would provide jobs for citizens by guaranteeing clean energy technologies and materials be made here in the United States. Lastly, the Build Back Better Act proposes strategies to reduce the cost of transitioning to clean energy, and make eco-friendly living more accessible to middle class families. The Build Back Better Bill has stalled in the Senate, and it is not currently expected to be passed into law. 

Economic Concerns

Most of the American public, including over 75 percent of Republican voters, is concerned about the threat of climate change and supports some sort of greenhouse gas regulation. However, Republican legislators remain firmly opposed to greenhouse gas regulations, citing mainly economic concerns. The resistance stems from a desire for U.S. energy self sufficiency, avoiding rising household consumption costs, and ensuring grid stability. 

Many supporters of deregulation are impressed by the economic benefits the United States enjoyed from an increase in oil and natural gas production; they point to increased competitiveness in international markets, added domestic jobs, and a more favorable balance of trade. Some argue energy policy should be an ‘economics leads’ approach, meaning the sector should prioritize first and foremost economic potential while demand is high, and if it decreases, oil and gas consumption may phase out on its own. Through this lens, they assert that increased greenhouse gas regulation in the U.S. will not aid in achieving emissions goals; rather, it will increase imports and dependence on energy sources globally. Therefore, the environmental impact of oil/gas production may be higher once transportation emissions and potentially less regulated foreign replacement fuel emissions controls are accounted for. In theory, by following economics and halting regulation, emissions will gradually decline and economic shocks can be avoided.

Others argue that the costs of increased regulation are too high for common people and families when compared to the predicted benefit of increased bureaucratic regulations. Some conservatives suggest greenhouse gas regulations could raise household energy prices, which would burden households and slow consumption. Opponents of greenhouse gas regulation argue that carbon pricing could cause a twofold problem for average Americans: first, that it would destroy American jobs, leading to outsourcing, and second, that energy producers would pass on the cost of carbon pricing to consumers.

Finally, critics highlight concerns over the stability of the electricity grid as renewable energy becomes increasingly common. Electricity generation from wind and solar resources are highly variable, which some argue poses risks to the energy grid’s reliability. Skeptics of renewable energy have also blamed renewable energy for large-scale blackouts, like those in Texas in February 2021.  Overall, opponents of greenhouse gas regulations have long pointed to the risks of grid instability and economic harm in arguing against governmental regulation and renewable energy production.

Future Regulation

Future regulations are uncertain as the pending Supreme Court Case, West Virginia vs. EPA, has the potential to undermine the current scope of regulatory ability and power of the EPA and the federal executive branch. The case challenges their authority to regulate greenhouse gas emissions under the Clean Air Act, and observers expect the Court to rule against the EPA. The ultimate decision will be indicative of the level of climate action that the Biden Administration can accomplish and the future of greenhouse gas regulation in the United States.

The international community is already designating specific environmental concerns to the United Nations Climate Change Conference 27th Session Conference of Parties (COP27) agenda. The main action areas for this conference are emissions reduction, with a specific call on the U.S. and other G20 nations to take leadership positions. Governments have also agreed on the need to address climate change impacts, adaptation, and climate finance at large. The UN has highlighted the urgency of these greenhouse gas emissions reduction goals and the combined commitment of governments, civil society, and the private sector in order to meet the 1.5°C ambition.

[ Map depicting the status of regional, national and subnational carbon pricing initiatives. Image courtesy of Center for Climate and Energy Solutions.]

Introduction

In response to the impending threat of climate change, governments have begun to explore options for regulating greenhouse gas emissions. One of these options is an emissions trading program called cap-and-trade. Cap-and-trade programs are market-based regulations on greenhouse gas emissions, especially carbon dioxide. They contain two main features. The first is a “cap” set by government regulators that establishes the maximum level of emissions and becomes more strict over time. The second main feature is the allocation of emission allowances to emitters through tradable permits, which allows individual emitters to buy and sell allowances in order to comply with emissions caps. Cap-and-trade programs incentivize firms to operate below their emissions cap, because excess allowances can be sold at a profit to other emitters.  These policies also add a layer of enforceability and accountability to corporate environmental protection.    

Cap-and-Trade Programs in the US

Although there is no national cap-and-trade program in the US today, there are several state-level and interstate programs worth noting. Support for cap-and-trade programs is highest in the Northeast and the Pacific Coast, which are the only regions of the country where emissions trading systems have been implemented.

The Regional Greenhouse Gas Initiative (RGGI), the first US program, was established in 2005 and is now active in eleven states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia. The RGGI has gradually attracted more states to become signatories and has been effective in reducing emissions and generating state revenue. Between 2006 and 2018, the RGGI led to a 48% decrease in emissions among plants that were under regulation. From 2009–2017, the initiative generated $4.7 billion of state revenue from allowance auctions.

Three states have their own cap-and-trade programs. California was the first state to implement an emissions trading system in 2012. The program enforces caps on approximately 85% of greenhouse gas emissions in the state. So far, decreases in emissions have been on track with the program’s climate goals, and both enforcement and compliance have been strong, with 100% of companies meeting compliance requirements. In 2021, Washington State passed the Climate Commitment Act which includes a “cap-and-invest” program among other features. “Cap and invest” programs extend upon cap-and-trades by allocating proceeds made by permit auctions to finance other climate resiliency projects. Most recently, Oregon adopted the Climate Protection Program in 2021 that included cap-and-trade measures upon fuel suppliers as part of an executive order by the Governor.  

Cap-and-Trades in Other OECD Nations 

Other nations in the Organization for Economic Cooperation and Development (OECD) have also adopted cap-and-trade policies. The European Union’s Emissions Trading System (ETS) is a unique case of a multi-national program that encompasses both EU States as well as some other European countries. This system covers around 41% of greenhouse gas emissions in the EU including those from power plants, energy-intensive industries, and civil aviation. Other individual countries that have implemented cap-and-trade policies are Australia, New Zealand, South Korea, Quebec and some cities and provinces in China while the country works towards a national standard.

Arguments For Cap-and-Trade

When designed with proper monitoring and enforcement measures, cap-and-trade programs have proven to be environmentally and cost effective. While cap-and-trades largely focus on carbon emissions today, prior initiatives have focused on other pollutants. For example, many proponents point to the success of the United States’ Acid Rain Program in the 1990s, which targeted sulfur and nitrogen oxide emissions that contribute to acid rain. This program exceeded expectations in decreasing acid rain and met its targets years ahead of the original timeline. Because of these measures, the impact of acid rain in the US is far less than it had been in the late 1900’s.

One main feature of cap-and-trade programs that draws support is their market-based nature. This means that the carbon being traded creates a new market, where the price of carbon is determined by principles of supply and demand. Research indicates market-based regulatory options are more cost-effective than traditional regulations such as fuel regulation or fuel economy requirements. This is because market-based approaches allow individual actors the flexibility to find the most-cost effective ways to cut emissions and implement the cheapest abatement options first. 

Supporters of cap-and-trade programs also stress that well-implemented programs are economically stimulating. Proponents argue caps on emissions can create a positive economic shock by spurring investment in green energy technologies and conservation measures. Additionally, supporters argue these policies promote the creation of new energy efficiency programs which generate jobs. It is also argued that revenue generated from auctioning carbon allowances can be directed toward investments for other green projects, including renewable energy production, conservation projects, and more energy-efficiency undertakings.

Arguments Against Cap-and-Trade

Many arguments against the implementation of emissions trading programs focus on the economic well-being of consumers. Critics argue that cap-and-trade programs damage the economy by raising energy prices, which would create a tax on energy consumption that falls on consumers as companies shift this burden onto customers instead of absorbing the costs themselves. In effect, this would burden low-income households and lead companies to outsource manufacturing, which would harm American jobs and increase unemployment. Opponents also point to previous examples of firms avoiding the cost of cap-and-trade programs. For example, the 2009 Waxman-Markey Bill sought to initiate the US’s transition into a more green economy with cap-and-trade programs, but it was met with high levels of corporate disapproval. In response, lawmakers included “handouts” to industry groups in the bill in an effort to generate enough support for the bill’s passage.

Opponents cite concerns over energy security (oil acquisition) in the US and a future of dependence on foreign nations. In the US, cap-and-trades will limit domestic oil production even though there are high levels of extractable resources. They argue that this will lead to a heavier reliance on foreign oil, especially from the Middle East.

Critics also assert that the design of cap-and-trade programs can be problematic. They cite past issues of cap-and-trade initiatives, like those associated with the European Union Emissions Trading System (ETS) or Regional Greenhouse Gas Initiative (RGGI). The EU ETS initially over-allocated emissions permits and set a very weak cap, rendering it ineffective until this was fixed. The RGGI initially taxed emissions without effectively reducing them overall. It is argued that these failures were due to weak design provisions, such as frequently fluctuating carbon prices and vague, over-allocated, and flexible emissions caps. 

Emissions leakage is a challenge that affects many cap-and-trade programs. Leakage occurs when emission reductions in one jurisdiction are accompanied by increased emissions in other regions with fewer rules, as emitters search for ways to avoid regulation. Critics point to emissions leakage as evidence of design flaws that require additional cooperation to address.