Economic and Emissions Implications of Product-level Carbon Intensity Standards

Abstract: Many countries have explored or adopted carbon pricing--often in the form of emissions trading systems (ETSs)--to reduce greenhouse gas (GHG) emissions. Increasingly, many jurisdictions are considering intensity-based and product-level design elements to address practical issues of affordability, industrial competitiveness, and coverage of harder-to-abate sectors. Product-level, intensity-based tradable performance standards (carbon intensity standards) have been examined previously, but often in the context of a single sector or product, such as road transportation fuels. Here we apply such standards to major energy and energy-intensive products in a numerical capacity expansion model of the US energy system and compare results to mass-based policy alternatives, namely a carbon price and an emissions cap. 

At comparable realized carbon prices, lower commodity prices under the intensity approach reduce the extent of demand-side fuel and technology substitution, but most abatement from economy-wide pricing is still realized. For the same realized emissions, the mass-based policy results in modestly lower total costs, whereas the intensity approach results in substantially lower costs to consumers unless carbon revenues from the mass-based policy are nearly fully returned. 

We conclude by providing actionable insights related to the design of market-based emissions reduction policies and suggest several areas for future research.