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

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.