Regulatory instruments for greenhouse gas control present a policy
dilemma: Market-based instruments such as cap and trade function to
reduce regulatory costs; but because they provide no guarantee that
costs will be reduced to acceptable levels it is infeasible to set caps
at sustainable levels. Emission taxes provide cost certainty, but their
comparatively high cost makes it infeasible to set tax rates at levels
commensurate with sustainability goals. However, there is a
straightforward solution to this dilemma: Just as cap and trade uses
free allowance allocation to minimize regulatory costs, an emission
tax’s cost can be mitigated by refunding tax revenue in such a way that
emission reduction becomes profitable. A refunded tax, like cap and
trade with free allocation, would be revenue-neutral within the
regulated industry. Marginal competitive incentives for commercializing
emission-reducing technologies would not be diminished by the refund,
and the refund could actually make it politically and economically
feasible to increase the incentives by an order of magnitude. Whereas
cap and trade merely caps emissions at an unsustainable level while
subjecting the economy to extreme price volatility, refunded emission
taxes could create a stable investment environment with sustained
incentives for emission reduction over a long-term investment horizon.
Author’s corrected manuscript: http://ssrn.com/abstract=1427106 2009: Circumventing the Weight-Versus-Footprint
Tradeoffs in Vehicle Fuel Economy Regulation
Publication reference: Johnson, Kenneth C., Circumventing the
Weight-Versus-Footprint Tradeoffs in Vehicle Fuel Economy Regulation
(December 14, 2009).
Available at SSRN: http://ssrn.com/abstract=1523398
Abstract
China, Japan, and the European Union use weight-based fuel economy
standards, whereas the U.S. Department of Transportation has rejected
such an approach in favor of footprint-based standards. Which is the
right approach? A weight-based standard can neutralize weight-changing
incentives that are detrimental to consumer welfare, but it also
neutralizes beneficial weight-changing incentives. Footprint-based
standards preserve weight-reduction incentives, but do not discriminate
between beneficial and detrimental weight-changing strategies; and
footprint-based standards may be more susceptible to gaming incentives
over the long term. The tradeoffs between weight and footprint can be
circumvented by employing a weight-based standard, which is constructed
to neutralized weight-changing incentives, in combination with
complementary regulatory measures that would be focused specifically
and exclusively on motivating beneficial weight reduction strategies.
"Cap-and-Trade with auctioned allocation, a price floor, and
output-based refunding"
"Cap-and-Trade with Governor-authorized safety valve"
(Click "Other"
link, look for "Ken Johnson".)
"Attribute-Based Vehicle Feebate"
(Click "Transportation"
link, look for "Ken Johnson".)
Of related interest: "Attribute-Based
Vehicle Feebates" (Several types of attribute-based vehicle
feebates are analyzed and compared using model-year 2005 sales data for
the U.S. market.)
June 23, 2007
To the California Air Resources Board
Commentary on the Market
Advisory Committee’s report, “Recommendations for Designing a
Greenhouse Gas Cap-and-Trade System for California,” June 30, 2007 (for
consideration at the July 27, 2007 Board meeting) http://www.arb.ca.gov/lists/ccmac06/8-comments_2007_07_23.pdf June 7, 2007
Reading Material for 25-26 June 2007 Feebate Forum, hosted by Rocky
Mountain Institute
- "Vehicle Feebates: A Comparison of Policy Alternatives"
- "Feebate Economics" http://www.rmi.org/feebate June 5, 2007
To the Market
Advisory Committee
Commentary on “Recommendations for Designing a Greenhouse Gas
Cap-and-Trade System for California,” June 1, 2007 draft report Ken_Johnson_Comments_2007_06_05.pdf April 9, 2007: Letter to
California Air Resources Board Re AB 32 and AB 493 ARB_2007_04_09.pdf March 16, 2007: Letter to Rep.
Dingell, U.S. House of Representatives Committee on Energy and Commerce
Re Rep. Dingell's Feb 27,
2007 letter to NGOs requesting guidance on climate policy Dingell_2007_03_16.pdf March 13, 2007: Letter to
California State Assembly Committee on Transportation
Re AB 493 (Ruskin, 2007), AB 32 (Nunez and Pavley, 2006), AB 1493
(Pavley, 2002)
Available at SSRN: http://ssrn.com/abstract=969444.
Excel files for Feebate Comparison: Feebates_AB493_Excel.zip 2006: Refunded emission taxes: A resolution to
the cap-versus-tax dilemma for greenhouse gas regulation
Regulatory instruments for greenhouse gas control present a policy
dilemma: Market-based instruments such as cap and trade function to
reduce regulatory costs; but because they provide no guarantee that
costs will be reduced to acceptable levels it is infeasible to set caps
at sustainable levels. Emission taxes provide cost certainty, but their
comparatively high cost makes it infeasible to set tax rates at levels
commensurate with sustainability goals. However, there is a
straightforward solution to this dilemma: Just as cap and trade uses
free allowance allocation to minimize regulatory costs, an emission
tax’s cost can be mitigated by refunding tax revenue in such a way that
emission reduction becomes profitable. A refunded tax, like cap and
trade with free allocation, would be revenue-neutral within the
regulated industry. Marginal competitive incentives for commercializing
emission-reducing technologies would not be diminished by the refund,
and the refund could actually make it politically and economically
feasible to increase the incentives by an order of magnitude. Whereas
cap and trade merely caps emissions at an unsustainable level while
subjecting the economy to extreme price volatility, refunded emission
taxes could create a stable investment environment with sustained
incentives for emission reduction over a long-term investment horizon.
Author's corrected manuscript: RefundedTaxes.pdf Refunded Emission Taxes: A Coherent
Post-Kyoto Policy Framework for Greenhouse Gas Regulation
Publication reference:
Johnson, Kenneth C., "Refunded Emission Taxes: A Coherent Post-Kyoto
Policy Framework for Greenhouse Gas Regulation" (October 15, 2006).
Available at SSRN: http://ssrn.com/abstract=934481
Abstract
Current experience with the Kyoto Protocol indicates that climate
sustainability goals will be attainable only if future regulatory
policy is grounded on a sound and clearly articulated policy rationale
that is relevant to political and economic realities. The mandatory
targets and timetables approach employed by Kyoto has a clear and
coherent rationale if environmental objectives take precedence over
cost considerations and emissions are capped at a sustainable level;
but in the context of real-world political constraints and priorities,
mandatory emission caps can have the perverse effect of actually reducing the likelihood that
climate sustainability will be achieved. An alternative policy
instrument that would be better adapted to political and economic
realities is a refunded emission tax, which would be revenue-neutral
within specific regulated industry sectors and would create long-term
market incentives for minimizing GHG emissions (rather than merely
capping emissions at an unsustainable level) while limiting
regulation-induced costs and eliminating market price volatility.
[Note: A summary version of this paper is published in Energy
Policy: http://dx.doi.org/10.1016/j.enpol.2006.10.020.
A less technical summary paper is also posted at http://ssrn.com/abstract=945570
under the title "A Sensible Policy Approach for Greenhouse Gas
Regulation".] California’s greenhouse gas law, Assembly
Bill 1493: Deficiencies, alternatives, and implications for regulatory
climate policy
Abstract
California’s Air Resources Board has finalized
regulations implementing Assembly Bill (AB) 1493, which requires
“maximum feasible and cost-effective reduction of greenhouse gas
emissions from motor vehicles”. By 2030, when California’s light-duty
vehicle stock has been substantially replaced by regulation-compliant
vehicles, total emissions from regulated vehicles are projected to be
reduced by 27% relative to “business-as-usual”, but are nevertheless
expected to be 8.7% higher than 2004 emissions. If an 8.7% increase
truly represents the “maximum feasible and cost-effective” emissions
reduction from transportation vehicles, then global climate
stabilization clearly will not be attained within limits of
“feasibility” and “cost-effectiveness”, and climate sustainability will
only be achievable through severely draconian measures. On the other
hand, if significantly greater emissions reduction would be feasible
and cost-effective, then the AB 1493 regulations fail to satisfy the
legislative policy mandate and the task is to find a regulatory
mechanism that will. The thesis of this paper is that the regulations
do not satisfy the mandate for several reasons, the most important
being the conflicting policy objectives of the “cost-constrained”
legislative mandate and the “quantity-constrained,” standard-based
regulatory instrument. An alternative policy instrument that would
better fit legislative policy and environmental objectives would be a
feebate-type system (although not necessarily a conventional vehicle
feebate).
Author’s corrected manuscript and Electronic Annexes: CA_AB1493.pdf, CA_AB1493.zip Jan. 30, 2006: Public commentary
for Climate Action Team's Dec. 8, 2005 draft report to the governor and
legislature KenJohnsonComments2.pdf Supplemental
comments (via
email) 2005: Feebates: An effective regulatory
instrument for cost-constrained environmental policy
Abstract
A feebate can be described as an emissions tax
combined with a refunded (i.e., negative) consumption tax, the balance
of which can be either positive (a fee) or negative (a rebate)
depending on how a taxed product’s emissions performance compares to
the industry average. A successful feebate-type policy is exemplified
by Sweden’s nitrogen oxide program, which has motivated power plant
operators in Sweden to reduce NOx emissions far below levels achieved
in the U. S. and other industrial countries. A key to this success has
been the fair and efficient manner by which the refund is distributed,
and a similar approach could be applied to automotive vehicle feebates
(for greenhouse gas reduction), making it possible to overcome
limitations of political acceptability and greatly improve policy
effectiveness. One such approach would distribute refunds in proportion
to vehicle mass (rather than at a fixed rate per vehicle), so that the
refund has at least an approximate correlation to vehicle utility and
economic value. A second, alternative approach would apply separate
feebates to multiple weight classes comprising limited, but
overlapping, weight ranges, so that each feebate covers vehicles having
similar transportation utility characteristics.
11/6/2004 correction:
This commentary is based on an erroneous interpretation of the proposed
section 1961.1 regulatory language. The commentary interpreted the
regulation as imposing a noncompliance penalty of $24.39 per g/mi debit
for PC/LDT1 and $15.06 per g/mi debit for LDT2, whereas the penalty
actually appears to be $24.39 + $15.06 = $39.45 per g/mi debit for both
weight classes. Thus, contrary to points (2) and (3) in the commentary,
there is no disparity between weight classes and the penalty may be
sufficient to deter noncompliance. But points (1) and (4) are valid.
The penalty formula changes the meaning of the Health and Safety Code
section 43211 in a manner that is confusing and without a clear policy
rationale. Furthermore, the policy intent of AB 1493 would be better
served if the penalty charge were applied to the purchase of emission
credits to offset the excess emissions represented by the
noncompliance. (Section 43211 stipulates that the penalty charge shall
simply be deposited into the General Fund.) Analysis and Commentary on
California Assembly Bill 1493, in response
to the California Air Resources Board's August 6, 2004 report, "Staff
Report: Initial Statement of Reasons for Proposed Rulemaking, Public
Hearing to Consider Adoption of Regulations to Control Greenhouse Gas
Emissions from Motor Vehicles": AB1493_Commentary.pdf
(Aug. 11, 2004)
CARB-supplied data used in the above analysis: for
CostEffect, Inventory,etc 052804_nl.xls
See "std_regressions" tab.
"Count of Model Name" is 2002 CA vehicle sales. (Note: Some sales
numbers inexplicably have fractional values.)
"TW" is Test Weight; "CW" is Curb Weight.
"CO2" (column I) is emissions (CO2 grams per mile).
03/28/2005 note:
This commentary is partly in error due to misinterpretation of the LEV
vehicle class distinctions. The ISOR defines the PC/LDT1 class as
"passenger cars and light duty trucks under 3751 lbs loaded vehicle
weight", but the 3751 -lb limit does not apply to cars. A more concise
definition is "passenger cars up to 6000 lbs loaded vehicle weight and
light duty trucks up to 3750 lbs loaded vehicle weight". See "A Policy
Critique ..." under 2005 above for a revised analysis based on the
correct LEV classification.