Interpreting tradable credit prices in overlapping vehicle regulations

Abstract

Prices of tradable credits in environmental regulations reveal information about abatement costs. This information guides regulatory assessments and future changes to the regulations. When regulations overlap, however, simple interpretations of credit prices no longer hold. We derive formulas for interpreting the value of credit prices for three overlapping regulations for passenger vehicles: corporate average fuel economy (CAFE) standards, greenhouse gas (GHG) standards, and zero emissions vehicle (ZEV) programs. Our assessment reveals that the marginal costs of reducing GHGs from conventional gasoline vehicles are virtually equal to the sum of CAFE and GHG credit prices, since each policy regulates emissions/fuel use in nearly the same way. We calculate that marginal costs ranged between $8 and $16 per ton of carbon dioxide in 2017. In contrast, marginal costs of selling one additional ZEV were $6,000 to $11,000 in 2017, which are higher than the ZEV credit price. This difference is because selling an additional ZEV yields compliance cost savings under the CAFE and GHG programs.