emissions will increase in the baseline year when the vehicle manufactur-
ers are allowed to sell CAFE credits into the system, as the reductions in
vehicle CO
2
only occurs in the future. Then, in the future, overall CO
2
allowances are reduced corresponding to the reduced CO
2
allocation to fuel
producers. In sum, over the vehicle lifetime, the initial increase in credits
and the future reductions in allocations will exactly offset each other,
assuming all the factors were estimated correctly. There is no net decrease
in CO
2
emissions.
One argument in support of a hybrid vehicle trading system is that,
even if it doesn’t reduce overall carbon emissions, it could help to reduce
the overall cost by encouraging fuel efficiency technology. However, this
system has no explicit mechanism to minimize GHG reduction costs in
transportation by selecting between fuel and vehicle technologies that offer
lower marginal costs. It just requires that any improvements made by
vehicle manufacturers be subtracted from future fuel producer allocations.
The cost control is entirely on the side of the vehicle manufacturers.
Another argument in support of a hybrid vehicle trading system is that
there are other benefits to reducing oil consumption, such as energy security,
trade deficits, and the effect of oil price shocks on the economy. However,
creating a very complex trading system, with no mandatory participation by
vehicle manufacturers, is unlikely to be the optimum solution.
Conclusion
Previous studies have identified most of the problems with trying to incor-
porate vehicles into carbon trading programs, but none are comprehensive.
The 2003 study by the Pew Center, for example, simply presented the
advantages and disadvantages of all the different options. The CCAP study
in 2000 was based primarily on arguments that there were other reasons for
improving vehicle efficiency than just carbon emissions. Neither study tried
to solve the problems from integrating vehicle manufacturers into overall
carbon trading programs, which are overwhelming. Some of the key prob-
lems are outlined below.
Double counting must be avoided. This is not a problem if only fuel
producers or vehicle manufacturers are included in a trading program.
Vehicle manufacturers have little impact on VMT and fuel producers have
little impact on vehicle technology, so it is desirable to include both.
Systems that provide allocations to vehicle manufacturers must subtract
this amount from fuel producer allocations.
Currently, only vehicles with gross vehicle weight ratings less than
8,500 pounds are subject to the fuel economy testing necessary for proper
emissions accounting. This requires that fuel producer allocations be
divided between LDVs and all other transportation uses. It also raises the
question as to how the other transportation uses should be handled in the
trading system.
Reducing Vehicle Emissions Through Cap-and-Trade Schemes 103

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