Benjamin Leard

Designing Efficient Markets for Carbon Offsets with Distributional Constraints

This paper presents an assessment of the relative efficacy of three key instruments – baselines, trade ratios and limits - which are under policy discussion in the design of carbon offset programs. We rank the instruments by their implications for total emissions, economic efficiency, and efficiency gain relative to a distributional transfer from capped to uncapped sectors. We find that the baseline is the best instrument for maximizing welfare as it directly reduces the share of offsets that are non-additional and that second-best policies do not sacrifice much welfare relative to the standard first-best policy prescription.

On the importance of baseline setting in carbon offsets markets

Incorporating carbon offsets in the design of cap-and-trade programs remains a controversial issue because of its potential unintended impacts on emissions. At the heart of this discussion is the issue of crediting of emissions reductions. Projects can be correctly, over- or under-credited for their actual emissions reductions. We develop a unified framework that considers the supply of offsets within a cap-and-trade program that allows us to compare the relative impact of over-credited offsets and under-credited emissions reductions on overall emissions under different levels of baseline stringency and carbon prices. In the context of a national carbon pricing scheme that includes offsets, we find that the emissions impacts of over-credited offsets can be fully balanced out by under-credited emissions reductions without sacrificing a significant portion of the overall supply of offsets, provided emissions baselines are stringent enough. In the presence of high predicted business-as-usual (BAU) emissions uncertainty or low carbon prices, to maintain the environmental integrity of the program, baselines need to be set at stringent levels, in some cases below 50 percent of predicted BAU emissions. As predicted BAU emissions uncertainty declines or as the carbon market achieves higher equilibrium prices, however, less stringent baselines can balance out the emissions impacts of over-credited offsets and under-credited emissions reductions. These results imply that to maintain environmental integrity of offsets programs, baseline stringency should be tailored to project characteristics and market conditions that influence the proportion of over-credited offsets to under-credited emissions reductions.

New Markets for Pollution and Energy Efficiency: Credit Trading Under Automobile Greenhouse Gas and Fuel Economy Standards

Recent changes to the Corporate Average Fuel Economy (CAFE) standards have created new opportunities for lowering the cost of meeting strict new standards through provisions for credit banking and trading. In this paper, we explore these new markets for reductions in both fuel consumption (fuel economy) and greenhouse gases (GHGs). We examine the two separate credits markets for fuel economy as regulated by NHTSA and for GHG gases under EPA and find that there are some important differences between them. For example, the market for NHTSA fuel economy credits has an effective credit price ceiling while the market for EPA GHG credits does not. We then evaluate the functionality of these markets using publicly available data on credit holdings and trades through 2013. Finally, we assess the potential for the following to interfere with well-functioning markets: overlapping regulations, lack of additionality, thin markets, and use of monopoly power. We find that features of robust trading markets are missing in these early years, and suggest reasons why. We also explore the implications of the fact that the two regulations are almost fully overlapping.

Voluntary Exposure Benefits and the Costs of Climate Change

We identify behavioral responses, defined as “voluntary exposure benefits,” that have the potential to offset measured costs of climate change. We quantify these responses for the transportation sector. We find that warmer temperatures and reduced snowfall are associated with an increase in fatal accidents. While the application of these results to climate predictions suggests that weather patterns for the end of the century would lead to 381 additional fatalities per year, the associated welfare losses are almost completely offset by voluntary exposure benefits from increased traveling. Our results motivate carefully examining behavioral mechanisms to accurately estimate the welfare effects of climate change.

Fuel Prices, New Vehicle Fuel Economy, and Implications for Attribute-Based Standards

Energy efficiency standards based on product attributes may interact with market conditions and affect the overall stringency of the standards. In this paper we analyze the interaction between gasoline prices and the redesigned and tightened federal fuel economy standards. Tighter standards will tend to reduce the effect of gasoline prices on market shares. Furthermore, under the standards a vehicle’s fuel economy requirement depends on its size. Lower gasoline prices incentivize consumers to purchase new vehicles with lower fuel economy, which are typically larger and therefore face lower fuel economy requirements. Using monthly data from 1996 to 2015, we find that fuel prices have had a smaller effect on market shares in recent years than previously. This result appears to be driven by a stronger response to rising than falling or stable prices. We construct two proxies for the stringency of the standards and we find limited evidence that the standards affect the relationship between fuel prices and market shares. Using the estimated responsiveness to fuel costs from the 2008 to 2015 period, the estimates imply that the 25 percent gasoline price decrease between 2014 and 2015 had a modest effect on average fuel economy and the average fuel economy required by the standards.

Are Consumers Willing to Pay to Let Cars Drive for Them? Analyzing Response to Autonomous Vehicles

Autonomous vehicles use sensing and communication technologies to navigate safely and efficiently with little or no input from the driver. These driverless technologies will create an unprecedented revolution in how people move, and policymakers will need appropriate tools to plan for and analyze the large impacts of novel navigation systems. In this paper we derive semiparametric estimates of the willingness to pay for automation. We use data from a nationwide online panel of 1,260 individuals who answered a vehicle-purchase discrete choice experiment focused on energy efficiency and autonomous features. Several models were estimated with the choice microdata, including a conditional logit with deterministic consumer heterogeneity, a parametric random parameter logit, and a semiparametric random parameter logit. We draw three key results from our analysis. First, we find that the average household is willing to pay a significant amount for automation: about

New Markets for Credit Trading Under U.S. Automobile Greenhouse Gas and Fuel Economy Standards

3,500 for partial automation and

Explaining the Evolution of Passenger Vehicle Miles Traveled in the United States

4,900 for full automation. Second, we estimate substantial heterogeneity in preferences for automation, where a significant share of the sample is willing to pay above

Weather, Traffic Accidents, and Exposure to Climate Change

10,000 for full automation technology while many are not willing to pay any positive amount for the technology. Third, our semiparametric random parameter logit estimates suggest that the demand for automation is split approximately evenly between high, modest and no demand, highlighting the importance of modeling flexible preferences for emerging vehicle technology.

Are consumers willing to pay to let cars drive for them? Analyzing response to autonomous vehicles

Recent changes to U.S. Corporate Average Fuel Economy (CAFE) regulations that allow for credit banking and trading have created new opportunities for lowering the cost of meeting strict new standards. For the first time, automakers will be able to trade credits between their own car and truck fleets and across manufacturers and bank credits over longer time periods. The potential to lower the costs of the regulations could be large if well-functioning credit markets develop. Starting in 2012, new regulations for greenhouse gas (GHG) emissions overlap with the CAFE standards, creating two separate regulations and two separate credit markets, one for fuel economy and one for greenhouse gases. We find that although the two regulations are supposed to be harmonized, there are important differences in how credits are defined and can be traded, increasing costs for manufacturers. We review evidence on how well the credit markets are working and assess how the following may interfere with well-functioning markets: overlapping regulations, reductions that are not additional, lack of price transparency, and use of monopoly power. We find that although trading volumes have been increasing, these markets could be more efficient in lowering GHG emissions and fuel use.