Williams 1999). The proposed legislation would capture these gains because it would ensure
that emitters faced a price of emissions; similarly, incentive-based regulation, such as the
tradable performance standard discussed below, would also create an emissions price. A more
traditional prescriptive approach would not establish such a price.
But the EPA need not take this route. It could, for example, develop tradable performance
standards across existing source categories in the electricity sector, perhaps by defining a new
source category for CO2 that included all fossil-fired generation (or fossil-fired steam generation).
Alternatively (and more boldly from a legal perspective), the EPA could identify
a cap-and-trade program as the ‘‘best system’’ of emissions reductions for the sector. This
would be distinguished from a tradable performance standard because it would cap the total
emissions from the sector, and it would require an allocation of emissions allowances to sources,
which under the CAA would be the prerogative of states. Either approach would expand
the set of emissions reduction opportunities for the sector, probably allowing substantially
greater reduction options at low cost. But harmonization of marginal costs across the economy
would only be possible if the EPA utilized a broad-based tradable performance standard
(or cap-and-trade program) that reached across many sectors, not all of which can plausibly
be regulated under the CAA.
Even with incentive-based regulation, the CAA would limit the coverage of the program.
For example, a CAA-based approach is limited to emissions activity inside the fence line at
covered facilities; EPA regulations probably cannot give credit for measures taken outside the
facility, such as transmission line upgrades, investments in renewable energy, or end-use efficiency
programs.
Furthermore, for a variety of reasons, incentive-based mechanisms are widely thought to
do a better job than prescriptive regulation in promoting innovation in production processes,
with this advantage growing over time (Kneese and Schultz 1975; Milliman and Prince 1989).
Ultimately (after 2030), legislative cap and trade would have put a price on CO2 for consumers
as well as producers, but tradable performance standards would not do so because downstream
product prices change little under this type of regulation (Burtraw et al. 2006).
Consequently, tradable performance standards would be expected to provide weaker
incentives for innovation and technology adoption for end-use efficiency improvements.
The economic inefficiency resulting from the incomplete price signal for consumers would
become more important in the long run as they made decisions about the purchase of new
household capital without accurate information about social costs.
Implementation Issues
Beyond the theoretical advantages and disadvantages of a regulatory program versus a legislative
approach to reduce GHG emissions, there are important implementation issues, including
the role for states and legal viability.
The Role for States
Under legislative proposals, the EPA would have primary responsibility for implementation
and enforcement, with some responsibilities delegated to other federal agencies—for example,
the Department of Agriculture would have regulated agricultural offsets. Under most