Various federal policy tools are available to reduce greenhouse gas emissions across the US economy and ultimately mitigate climate change. Key criteria can help policymakers weigh the value of these tools, taking into account innovation and ancillary effects such as air pollution and environmental justice.
To minimize increases in the overall temperature of the planet and related impacts, the US federal government can use climate policy to reduce the amount of greenhouse gases in the atmosphere. Climate policy includes policies that help mitigate climate change and adapt to climate change.
This article lays out the primary policy instruments—in general terms—that can help reduce atmospheric greenhouse gases. This article also describes how such policies can be evaluated, highlighting a set of criteria that can help to determine how effective, efficient, and equitable a policy will be in achieving its climate goals.
Tools in the Climate Policy Toolkit
The United States emits billions of metric tons of greenhouse gases into the atmosphere every year—6.5 billion metric tons of carbon dioxide–equivalent in 2019. The infographic in this magazine shows the breakdown of where these emissions originated, by economic sector. Major policy approaches under consideration for reducing greenhouse gases fall into three main categories: carbon pricing, technology subsidies, and performance standards. Carbon pricing policies provide a direct financial incentive to reduce emissions and can be implemented through a tax or fee (e.g., in dollars per ton), or through the establishment of a market-based cap-and-trade system.
Technology and innovation subsidies provide incentives for low-emissions technology deployment and innovation and can be implemented through tax credits or direct public funding. Performance standards require specific products or processes to meet certain minimum or average levels of technical performance (e.g., miles per gallon, tons of carbon dioxide per kilowatt-hour) and can range from being flexible, broad, and market based, to being prescriptive and site specific. Beyond these three major approaches, procurement policies, international agreements, and a wide array of other programs can play important roles in a comprehensive climate policy portfolio.
One of the most important attributes of individual climate policies is whether they are based principally on economic incentives, which leverage market forces to reduce emissions, or prescriptive regulatory approaches that rely on regulatory requirements and associated penalties. Many policies—particularly performance standards—fall on a continuum depending on their degree of flexibility across firms, locations, and technologies for meeting mandates. The different policy approaches can be and are used in combination.
Benefits and Costs
When evaluating climate policy approaches, the overall benefits and costs of the policy to society are important to consider. In estimating the potential or actual benefits of a policy, several factors are critical, including the social cost of carbon and the co-benefits of the policy.
Carbon Pricing Policies
Carbon pricing policies require companies to pay a price for each ton of carbon emissions they release. This price, which generally escalates over time, changes the relative cost of fuels and products, increasing the price of high-emitting fuels and products relative to those with lower emissions.
- A carbon price is comprehensive and percolates through the entire economy, providing an incentive for all decisionmakers to find ways of reducing emissions (e.g., improving the boiler in a factory, buying a more efficient air conditioner at home).
- A carbon price provides businesses and households with the flexibility to make decisions based on their own information.
- Existing markets can seamlessly incorporate the value of reducing emissions in the prices of all goods and services.
- Explicit carbon pricing policies have faced significant political headwinds in the US Congress.
Performance standards are a broad set of policies that set benchmarks that firms must meet. These standards can be applied in many different economic sectors. Examples of performance standards include clean electricity standards and renewable portfolio standards in the power sector (which set benchmarks for the amount of electricity that must come from low-carbon energy sources); fuel economy standards (miles-per-gallon standards), renewable fuel standards, low carbon fuel standards, and zero-emissions vehicle standards in the transportation sector; emissions performance standards in the industrial sector; and appliance efficiency standards and building codes in the commercial and residential buildings sector.
Performance standards can be designed with widely varying degrees of flexibility and tradability across firms. On the most prescriptive end of the continuum are technology standards, which require firms and facilities to install and use specific types of technologies to reduce emissions. A good example of this prescriptive type of standard can be found in the US Environmental Protection Agency’s New Source Review requirements for the construction of new or significantly upgraded power plants: to be granted a permit, these plants must include plans to install “Best Available Control Technology” for mitigating conventional air pollutant emissions.
More flexible performance standards generally do not dictate what technologies a firm should use to meet established benchmarks, instead allowing firms to do so in the most cost-effective ways they can. These policies typically consider a broad range of technologies as compliance options, sparking industry creativity with respect to how they meet the targets at lowest cost. Such standards may establish different benchmarks at the facility or firm level, or use tradability to offer flexibility for meeting benchmarks across a substantial portion of the economy. For example, clean electricity standards have been proposed that set targets for an increasing share of overall electricity sales to come from clean power, which would give rise to a national market for clean power credits.
- Performance standards increase the cost of low-performing technologies (e.g., a car with higher greenhouse gas emissions) relative to higher-performing technologies.
- Performance standards have less impact on consumer prices, compared with carbon pricing policies.
- Performance standards can be effective alone or when combined with carbon pricing policies.
- When designed carefully, performance standards can be cost-effective within a given sector.
- Performance standards lead to more expensive emissions reductions, compared to carbon pricing policies.
Technology Deployment Subsidies
Most technology deployment subsidies in the United States have taken the form of tax credits; other approaches include direct payments, loan guarantees, reverse auctions, feed-in-tariffs, and contracts for differences.
Tax credits provide a financial incentive that encourages a particular economic activity through the reduction of tax payments. In the clean energy context, tax incentives motivate companies and households to build, produce, or consume technologies and products that have low or zero emissions. For instance, a tax incentive might persuade people to buy electric vehicles rather than gasoline vehicles; encourage electric power from solar, wind, and other renewable power sources; or support the capture and underground storage of carbon dioxide.
Tax credits have been employed for years at the federal level. Examples include the Production Tax Credit and Investment Tax Credit for wind and solar power, and the federal tax credit for electric vehicles, which reduce the cost of building and deploying these technologies.
- Tax credits spur considerable private investment in initial deployment.
- Tax credits encourage technological innovation and learning-by-doing through deployment.
- Cost-ineffective way of reducing emissions over the long term, in part because tax incentives can require large amounts of public spending as deployment scales up.
Public procurement of goods makes up a sizable portion of the US and global economies—12 percent globally, by World Bank estimates. By establishing “green procurement” policies and programs, policymakers can encourage or require government agencies to purchase relatively sustainable goods (e.g., steel and cement, vehicles, office equipment). Given the size of the federal government, procurement at the federal scale can drive innovation investments, creating or bolstering markets for advanced technologies and high-performance products that otherwise would be less competitive. By establishing a “demand-pull” for the development of emerging technologies, government procurement creates a customer base and reduces the risk associated with investing in advanced energy technologies and other emissions reduction techniques.
Public Funding for Innovation
Investing in research and development of advanced clean energy and emissions reduction technologies is a critical element of climate mitigation policy. Because the private sector often underinvests in long-term research, the federal government can—and frequently does—play a key role in providing foundational funding for the research and development of emerging technologies. The federal government can increase funding for this activity as a strategy for addressing climate change.
The government recently authorized billions of dollars of additional federal funding for clean energy research, development, and deployment via the Energy Act of 2020, which focuses on fostering energy innovation by modernizing US energy policies. The act establishes research and development programs for energy storage technology, hydrogen, carbon capture, and more.
Social Cost of Carbon (SCC)
A policy tool that enables decisionmakers to place a value on the benefits of a policy that reduces carbon dioxide emissions. The SCC does so by measuring, in dollar terms, the damage caused by one ton of carbon dioxide emissions released into the atmosphere.
The Paris Agreement on climate change is a legally binding agreement in which the countries that join must pursue significant efforts toward keeping global warming below 2°C. The international popularity of the Paris Agreement can in large part be attributed to its flexibility: individual countries establish their own targets while being held accountable to amplify their goals over time. The Paris Agreement and other international agreements are important policy tools for contributing to multinational climate strategies and for leveraging reciprocal action by other countries to reduce overall global emissions.
Cross-Cutting Criteria for Policy Evaluation
How can decisionmakers decide among the available tools for crafting climate policy, given the wide range of options available to them? Described below are various criteria for evaluating climate policy strategies.
Distributional Impacts and Equity
Policies have different effects on different subgroups of people, a phenomenon related to equity known as “distributional impacts.” Increasingly, concerns about the distributional impacts of policies on different individuals, groups, communities, and regions assume a central place in the climate policy conversation. The equity impacts of a policy—its relative impacts on low-income and non-white communities compared to higher-income and white communities—are important for policy design and evaluation. Communities of color, low-income communities, and other environmental justice communities are most vulnerable to both the effects of a changing climate and the potential costs of climate policy. And many in these communities do not get the benefits that have accrued elsewhere.
Driving Technological Innovation
Technological innovation is a crucially important element of a comprehensive climate policy strategy, both domestically and internationally. Deep emissions reductions will depend heavily on improvements in the availability, cost, and performance of technologies that can reduce emissions while meeting other needs across multiple sectors. Innovation in carbon removal technologies—including direct air capture—also is necessary to compensate for hard-to-avoid emissions in a net-zero strategy, and to drive net-negative emissions if we surpass tolerable levels of atmospheric greenhouse gases.
As the US economy shifts away from fossil fuels and toward clean energy sources, employment patterns are changing—and workers and communities that depend on fossil fuel jobs could be negatively impacted. While measuring the employment-related impacts of any particular policy is challenging—as job losses may occur in one place and employment may increase in another—it is important for decisionmakers to evaluate the effects of policies on existing jobs, workers, and communities. It is also important to consider how policies can lead to job growth—and what complementary policies or programs might be needed to prepare people to fill new roles.
Ways in which a policy helps society beyond its principal motivation or purpose. For instance, if a carbon price is implemented to reduce greenhouse gas emissions and mitigate climate change, the same policy will also tend to reduce local air pollution.
The United States already has established emissions reductions policies at both the federal level (e.g., tax credits for wind, solar, carbon capture, and electric vehicles; automobile standards) and the state level (e.g., renewable portfolio standards, cap-and-trade systems). New emissions reduction policies introduced in the United States therefore will come into force in combination with policies already on the books. To design a robust and cost-effective policy portfolio, it will be important to understand how policies interact and where new and existing policies complement each other.
Effectiveness in Achieving Emissions Reductions
A clear and obvious criterion for evaluating climate policy is the amount of emissions reductions achieved. If a policy does not reduce emissions—or, worse, if the policy leads to increased emissions—then it is not effective. The pace and cumulative quantity of reductions over time also is critical; for instance, a policy that leads to a small amount of reductions initially may lead to greater reductions later (e.g., through innovation), resulting in a significant overall effect.
International Competitiveness and Reciprocal Action
Maintaining and improving international competitiveness is important for the strength of the US economy and national employment. The effectiveness of various climate policy options depends on how US climate policy affects the competitiveness of US companies in world markets, the treatment of international imports, and international climate actions. Domestic policy can motivate actions by other nations; for instance, border tax adjustments can level the playing field and increase the cost of carbon-intensive imported goods, encouraging other countries to make less-carbon-intensive goods.
Climate change is not a short-term problem; to avoid its worst impacts, long-term and durable change is necessary. As political administrations and elected officials shift over time, federal policy can change drastically. The durability of law—in other words, the likelihood that regulations and statutes will remain robust as political power shifts—is a critical criterion by which to evaluate policy. Durable legislation and regulation provide more certainty for firms making important investment decisions, enabling a more consistent, stable environment in which to address climate change over the long term.
The cost-effectiveness of a climate policy quantifies the cost of emissions reductions, per unit, generated by the policy (typically measured in dollars per ton of carbon dioxide or other greenhouse gas). For instance, if one policy costs $10 to reduce emissions by one ton and another policy costs $100 to reduce emissions by one ton, the first policy is more cost-effective. Cost-effective policies lead to a stronger economy because they don’t waste resources and can achieve more ambitious emissions reductions for a given amount of resources spent.
Federal policy to reduce greenhouse gas emissions can take many shapes. Beyond the factors described above, three additional observations can guide the climate policy conversation. First, the climate is changing due to human activity—and fossil fuel use in particular. Reducing net greenhouse gas emissions to zero is critical to halting global temperature increases and related disruptions to the climate system. Second, technology, policy, and markets all are important in mitigating climate change. A technology-inclusive approach to emissions reductions that embraces a wide range of options is both necessary and available. Finally, technological advances have made clean energy and other emissions reduction options more feasible and affordable, which can pave the way for ambitious climate action.
To successfully mitigate climate change, the policy options above must balance the needs of different sectors and communities, encourage businesses and individuals to choose low-emissions options, and spur technological innovation.
This article is available as a published RFF explainer titled “Federal Climate Policy 101: Reducing Emissions.”