Cap-and-Trade

Abstract

This paper identifies for transportation planners five key implications of extending cap-and-trade for greenhouse gas emissions to the transportation sector, as envisaged in legislative and regulatory proposals in the U.S. Congress and in the western states and Canadian provinces. First, cap-and-trade would increase gasoline prices as refiners and fuel importers pass on the cost of carbon allowances; a $30 per metric ton price of carbon allowances equates to 27 cents per gallon of gasoline. Second, transit, smart growth, and other emission reduction projects might be eligible for billions of dollars in revenue from carbon allowance auctions. Third, as emissions would be constrained at the level of the cap, transportation projects would be unlikely to have any impact on aggregate emissions. Any environmental benefit of a project (reduced emissions) would be converted into an economic benefit (reduced carbon allowance prices and thus reduced compliance costs in other sectors). Fourth, the converse of this argument suggests a weakening of the potential to use the environmental review process to mitigate emissions from development projects. There may be an economic impact (higher carbon allowance prices), but not an environmental impact (emissions would be constrained at the level of the cap). Finally, extending cap-and-trade to the transportation sector would eliminate the potential for revenue from the sale of offsets, as this would double count emission reductions.

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