At the time of this writing Congress is considering enacting a “cap-and-trade” system to control the emissions of gases that contribute to climate change.1 Such a system would cap emissions at a predetermined level and issue a number of permits equal to that cap. Any controlled entity such as electric utilities or oil refineries would have to surrender a permit for each ton of CO2 emitted. The permits could be traded, so that an entity desiring to increase production and thereby emit additional tons of CO2 or other global-warming gasses could buy additional permits from a permit holder willing to sell. The market price of permits will be reflected in the cost of production and passed on to the ultimate consumer. In the trucking sector the permit price would have the same effect as a tax on fuel.
The cap-and-trade system introduces a price on CO2 emissions, as a tax would, and provides incentives for the adoption of fuel-saving technologies as well as for the adoption of operational methods to save fuel. Applying this system over the economy as a whole it can lead to an efficient pattern of emission reduction. For example, if it is cheaper to reduce emissions from electric utilities than from another industrial plant, the electric utility will cut emissions and sell the permits it no longer needs to the industrial emitter. The industrial emitter will be willing to buy those permits as long as it is cheaper than reducing its emissions by technology or operational changes.
Once a cap is in place, regulators may have less of a need to establish fuel consumption standards for a particular covered sector. This is because any reduction in CO2 emissions coming from trucking, for example, will result in more emissions elsewhere among covered entities, so that the total emissions remain unchanged. Similar to the case with fuel taxes, this economizes on the information regulators need about technology, operating conditions, and duty cycles for trucking operations. Under a cap-and-trade system individual firms make the decisions based on their knowledge of the operations and the price of carbon emissions.
By setting a cap, the ultimate emissions are known, but the cost of achieving the cap is uncertain. The cost will emerge in the market as firms consider technological and operational changes versus the cost of purchasing permits. The price will fluctuate as the demand for permits will change in response to technological developments, to changes in expectations about future economic growth and hence the demand for permits, to weather variation, and even to interest rate changes.
Introduction of a cap-and-trade system will increase governmental administrative burdens for monitoring and policing the system, supervising markets in permits and derivatives that will emerge in financial markets. Similar to the case with fuel taxes, there may be concern that the increase in fuel prices, given political limitations on how tight a cap can be legislated, will be too small to have major impacts in generating change in technology adoption.
A cap-and-trade system is designed to cap carbon or other global-warming gases, not oil consumption. While higher carbon prices will be passed on to fuel prices and reduce oil consumption, oil security concerns may require additional measures. While fuel consumption standards would reduce oil consumption, a cap-and-trade system could accommodate an additional charge within the system so as to provide the additional incentive to save oil. For example, it could be required that 1.25 tons of CO2 emissions coming from oil be traded for 1 ton of coal emissions.
A technology mandate would be a regulation requiring operators of medium- and heavy-duty vehicles to purchase and use specified designs or models of vehicles or components. The required vehicles and equipment would be those embodying fuel-saving technologies. The regulator would establish a certification process to identify energy-efficient vehicles and components and would publish lists of complying models. The California Heavy-Duty Vehicle Greenhouse Gas Emission Reduction Regulation is the most relevant example of such a regulation.
In December 2008 the California Air Resources Board (CARB) adopted a regulation requiring certain operators of certain kinds of trucks to either use EPA SmartWay-certified tractors and trailers or to retrofit their vehicles with SmartWay-verified technologies. The SmartWay vehicles and equipment save fuel primarily through improved tractor and trailer aerodynamics and the use of low rolling resistance tires. The regulation applies to 53-ft or longer van trailers and to tractors that pull these trailers in California. Tractors that drive less than 50,000 miles per year are exempt, and tractors and trailers that operate within a 100-mile radius from a home base are exempt from the aerodynamics requirements.
Operators who choose to comply by retrofitting must equip their trailers with low rolling resistance tires and with aerodynamic fairings or other SmartWay-approved technologies. The technologies required will depend on a percentage greenhouse gas emissions reduction assigned to each device by CARB.
From 2010, when the rule goes into effect, through 2020,