The Economics of
Climate Action

Whether it is mitigating greenhouse gas (GHG) emissions, or developing strategies to protect communities and natural resources from the compounding impacts of increasing temperatures, additional investments are necessary to combat climate change. Identifying resources to support climate action is imperative, as inaction is a far costlier proposition.

The costs of inaction on climate change can manifest directly, indirectly, and through market volatility and trepidation prompted by uncertainty and risk. Direct costs are primarily associated with infrastructure losses caused by the increasing frequency and intensity of extreme weather and natural hazards associated with increasing temperatures. Indirect costs manifest as suppressed growth and valuation tied to impacts on both physical assets and people, such as the diversion of resources to support rebuilding and recovery after a massive storm or wildfire. There is also a cost associated with climate-induced market uncertainty, including from destabilization of socioeconomic and geopolitical systems, such as a significant drought driving intergovernmental conflict over water resources, reducing consumer and investor confidence.

Identifying resources to support climate action is imperative, as inaction is a far costlier proposition.


Since 1980, climate change has cost the U.S. economy an estimated $1.1 trillion (
NCA, 2018). A significant contributor to these costs is the increasing number of billion-dollar weather and climate disasters (NOAA, 2020).

Across the West, the massive rain and snow storms caused by atmospheric rivers have cost $51 billion over the past 40 years, with an average of $1 billion annually (Corringham et al., 2019). Other billion-dollar events that have touched Nevada map to wildfire and drought, with the 2012–2015 drought across the American West costing the state $55.7 billion (NOAA, 2020). Preliminary estimates indicate the unprecedented 2020 wildfires across the Western United States could exceed $20 billion in direct costs alone, in addition to the profound impacts to decimated local economies, communities exposed to record-breaking poor air quality, and to the families who have tragically lost loved ones.

By the end of the century, climate change could cost the United States hundreds of billions every year under current policies (NCA, 2018; Figure 1). Fortunately, upfront investments to support climate mitigation, resilience, and adaptation can offset the overwhelming cost of inaction.

Figure 1. Economic Impacts of Climate Change and Climate Action in the United States.

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The projected costs associated with climate change impacts based on the current emissions trajectory are compared with the long-term savings that could be achieved by reducing GHG emissions and keeping warming below the 2ºC (3.6ºF) threshold. (Source: U.S. National Climate Assessment, 2018)

The social cost of carbon (SCC) is the metric used to define the cost of inaction. The SCC for a given year is defined as “an estimate, in dollars, of the present discounted value of the future damage caused by a 1-metric ton increase in carbon dioxide CO2 emissions into the atmosphere in that year, or equivalently, the benefits of reducing CO2 emissions by the same amount in that year (NASEM 2017).” Since 2008, the federal government has been required to use the SCC in its cost-benefit analyses. However, the SCC was not standardized until the Obama administration convened an Interagency Working Group (IWG), which developed a harmonized methodology for determining the value of the SCC based on scientific and economic expertise and decades of climate research. Table 1 shows a range of SCC values and discount rates per year, as established by the IWG. Discount rates convert future damages into present-day values, thus “a high discount rate means that future effects are considered much less significant than present effects, whereas a low discount rate means that they are closer to equally significant (RFF 2019)”.

Table 1: Social Cost of Carbon ($/ton CO2), 2025–2050

Discount RateIn 2007 $In 2015 $
202520302050202520302050
5%$14$16$26$17$19$31
3%$46$50$69$56$60$83
2.50%$68$73$95$82$88$115
2007$ values from IWG Technical Support Document, 2016 revision
2015$ values derived from 2007$ values using the Bureau of Labor Statistics’ Inflation CalculatorNOTE: For additional detail on the mechanics and limits of the SCC – and how its use has changed under the Trump administration – please see this explainer from Resources for the Future. Also see how the Climate Impact Lab is exploring how to establish an SCC at a granular level across the U.S. as well as impacts to morbidity and mortality.

Estimates suggest that by meeting the state’s emissions-reduction targets, Nevada would prevent between $172 and $786 million of economic damages by 2030 and up to $4 billion by 2050.

Using the SCC in each target year, estimates suggest that by meeting the state’s emissions-reduction targets, Nevada would prevent between $172 and $786 million of economic damages by 2030 and up to $4 billion by 2050 (Table 2).

Table 2. Estimated Avoided Costs of Meeting Nevada’s GHG Emission Targets Under SB 254

202520302050
Emissions-reduction Target (%)28% reduction below 200545% reduction below 2005100% reduction below 2005 (net-zero)
Estimated Additional Emissions Reductions (MMTCO2)2937
Range of Social Cost of Carbon ($ millions, 2015 dollars)$34-$165$172-$786$1,106-$4,042
Range of costs are calculated by multiplying the SCC (in 2015 $) from Table 1 by the additional emissions reductions (MMTCO2) per year. Additional emissions reductions are estimated by subtracting the reference CO2 emission projections from the emission projections that meet SB 254’s emission targets. MMTCO2e is from Nevada’s Statewide Greenhouse Gas Emissions Inventory and Projections, 2019. Calculations assume a 1:1 ratio of MMTCO2e:MMTCO2, thus these calculations err on the conservative side. Because the Inventory only projects to 2039, emissions were assumed to change linearly through 2050.

Recognizing that upfront investment will significantly reduce future costs and improve the health and safety of Americans, states are developing creative approaches to finance climate action now. While some of these programs are directly funded by state appropriations, more often these investments are leveraged—if not fully supported—by federal grant programs, tax credits, and bond subsidies. Table 2 outlines federal programs that have been available at some point to support state climate-related activities. Although not all are currently operational and funded, there are some opportunities that could be pursued now to garner additional resources.


Federal Climate-Related Funding Programs

(compiled by the United States Climate Alliance)

GRANT PROGRAMS

Current Programs to Enable Investment in Clean Energy, Low-Carbon Transportation, and Building Efficiency

  • State Energy Program (SEP):
    • Created in 1996 by merging the State Energy Conservation Program and the Institutional Conservation Program. Housed in the U.S. Department of Energy (DOE) and provides funding and technical assistance to states to enhance energy security, advance state-led energy initiatives, and maximize the benefits of decreasing energy waste.
    • In 2009, the American Recovery and Reinvestment Act (ARRA) allocated $3.1 billion for the program with no matching fund requirements.
    • Gives states full autonomy to administer funds to programs or projects that align with state-specific energy initiatives, including building codes, appliance standards, public benefits programs, renewable portfolio standards, retrofit programs, skill trainings, alternative fuels, technical assistance services, solar and wind energy development.
    • Every dollar invested into the SEP saved $4.50 in energy costs.
  • Weatherization Assistance Program (WAP):
    • Began in 1976 from Title IV of the Energy Conservation and Production Act and is housed in the DOE.
    • Provides states with funds to help low-income households increase the energy efficiency of their homes and improve their health and safety.
    • Gives complete autonomy to state governments to administer funds in accordance with state-specific production capacity and energy goals.
    • Supports 8,500 jobs and provides weatherization services for 35,000 homes every year. In 2009, ARRA invested $5 billion into WAP. Oak Ridge National Laboratory found that the ARRA investment resulted in a program-wide energy savings of $1.1 billion.
  • Low- and No-Emissions Bus Program:
    • Housed in the U.S. Department of Transportation (DOT) but administered by the Federal Transit Administration (FTA). Supports the transition of the country’s public transit fleet from diesel to battery electric or hydrogen fuel cell vehicles.
    • Established in 2015 from the Fixing America’s Surface Transportation Act (FAST Act) and is allocated a set $55 million per year until FY 2020. Congress has passed legislation to increase the program’s funding for the past two years. The FTA announced that for FY 2020 there will be $130 million available in grants to state and local governments.
    • Grant funds go directly to state and local governments. In FY 2019, seventeen U.S. Climate Alliance states received $38.9 million to fund battery-electric buses, charging infrastructure, and workforce development needs for electric vehicle deployment.
  • Diesel Emissions Reduction Act (DERA):
    • Created in the Energy Policy Act of 2005 and appropriated funds through state and federal loan programs to retrofit diesel vehicles and promote emissions reductions from diesel engines.
    • Base funding to states is determined by overall participation—if all states qualify for funding, each state receives 2% of the appropriated funds. A state that matches funding from DERA receives an additional 50% of the amount allocated to the specific state.
    • In 2010, DERA was amended to offer rebates as a new funding mechanism and authorize $100 million for the period FY 2012 through FY 2016.
  • Clean Cities Coalition Network:
    • Housed in the DOE’s Vehicle Technologies Office (VTO). Builds local partnerships to advance affordable domestic transportation fuels and other fuel-saving technologies and best practices.
    • Since 1993, VTO has distributed $460 million in transportation project awards. The VTO awards competitive grants that are cost-shared. Traditionally, projects from the Clean Cities Coalition Network have leveraged 2:1 matching funds from public and private partners.

Reinstate Energy Efficiency Conservation Block Grant Program to Enhance States’ Ability to Lower Energy Bills

  • Energy Efficiency Conservation Block Grant Program (EECBG):
    • ARRA-created program housed in the DOE. Provides direct funding to larger municipalities and states to support local government projects and consumer initiatives to lower energy costs and reduce fossil-fuel emissions.
    • Efficient and effective in job growth and retention. During the period 2009–2015, $2.2 billion in EECBG funding for broad programs resulted in a net gain of 62,902 job years, meaning that a job was created or retained for every $36,260 in program expenditures.

Programs to Build Resilience, Restore Environmental Quality, and Address COVID-19 and Climate Impacts

  • Building Resilient Infrastructure and Communities (BRIC)
    • New pre-disaster hazard mitigation program from the Federal Emergency Management Agency (FEMA) that supports states, local communities, tribes, and territories as they undertake mitigation projects to reduce risks from disasters and natural hazards.
    • Aims to categorically shift the federal focus away from reactive disaster spending and toward research-supported, proactive investment in community resilience.
    • Replaces the existing Pre-Disaster Mitigation (PDM) program and is a result of amendments made to Section 203 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) by Section 1234 of the Disaster Recovery Reform Act of 2018 (DRRA).
    • FEMA published notice of the BRIC proposed policy in the Federal Register for public comment, which closed on May 11, 2020. Following the review and adjudication of comments received on the proposed policy, FEMA anticipates finalizing the proposed policy and releasing a Notice of Funding Opportunity by fall 2020.
  • Hazard Mitigation Grant Program (HMGP):
    • FEMA program. Supports cost-effective post-disaster projects and is the longest-running mitigation program among FEMA’s three grant programs.
    • Helps communities implement hazard mitigation measures following a Presidential Major Disaster Declaration in the areas of the state, tribe, or territory requested by the governor or tribal executive. Enacts mitigation measures that reduce the risk of loss of life and property from future disasters. Studies have shown that every $1 spent on hazard mitigation projects equals $4 of future damages mitigated.
    • HMGP recipients (states, federally-recognized tribes, or territories) have the primary responsibility for prioritizing, selecting, and administering state and local hazard mitigation projects.
    • Authorized under Section 404 of the Stafford Act.
    • FEMA provides up to 75% of the funds for mitigation projects. The remaining 25% can come from a variety of sources (e.g., cash payment from the state or local government, donated resources, Increased Cost of Compliance funds from a flood insurance policy, or loans from other government agencies).
  • Clean Water and Drinking Water State Revolving Funds (SRFs):
    • The U.S. Environmental Protection Agency (EPA) has two programs: the Clean Water State Revolving Fund (CWSRF) and the Drinking Water State Revolving Fund (DWSRF).
    • CWSRF was created in the 1987 amendments to the Clean Water Act. DWSRF was created in the 1996 amendments to the Safe Drinking Water Act.
    • Both SRFs are a federal/state partnership to help ensure clean and safe drinking water across the nation. They make low-interest loans for important water quality projects that are repaid to the SRFs to then be used for other projects. The federal government awards each state a capitalization grant to go into the SRFs. Each state must provide a 20% match to the federal funds. States have the discretion to set specific loan terms, including repayment periods and interest rates.
    • CWSRF has provided $138 billion to communities through 2019. DWSRF has provided more than $38.2 billion to water system projects though 2018.
  • EPA’s Geographic Programs:
    • Support efforts to protect and restore various communities and ecosystems impacted by environmental problems.
    • Recent geographic focus areas include Chesapeake Bay, Gulf of Mexico, Lake Champlain, Long Island Sound, Lake Pontchartrain, Southeast New England Estuary, Great Lakes, South Florida, San Francisco Bay, and Puget Sound.
  • Rural Energy Savings Program (RESP):
    • U.S. Department of Agriculture (USDA) program. Provides loans to rural utilities and other companies that provide energy-efficiency loans to qualified consumers to implement durable, cost-effective energy-efficiency measures.
    • Funds may be used for implementing energy-efficiency measures to decrease energy use or costs for rural families and small business.
  • Conservation Stewardship Program (CSP):
    • Natural Resources Conservation Service (NRCS) program. Helps farmers and ranchers maintain, improve, and expand activities that benefit natural resources (including soil, water, air, and wildlife habitat) or conserve energy.
    • Payments are based on performance. As with EQIP, CSP can promote carbon sequestration by improving soil health.
  • Environmental Quality Incentives Program (EQIP):
    • NRCS program. Provides financial and technical assistance for activities that benefit air quality, water quality, soil and water conservation, and wildlife habitat.
    • It incentives practices such as cover crops, transition to resource conserving crop rotations and precision agriculture technologies along with a similarly broad suite of incentive practices for ranchers and non-industrial private forest operators.

Broadband Expansion

    • A broadband pilot program from the USDA that offers federal loans, grants, and combinations thereof to facilitate broadband deployment in rural areas. Provides funds for the costs of construction, improvement, or acquisition of facilities and equipment needed to provide broadband service to rural areas without sufficient broadband access (defined as 10 Mbps downstream and 1 Mbps upstream). $600 million available for the second round of funding (application period closed April 2020).
    • Established through the Consolidated Appropriations Act in 2018.
    • Cooperatives, nonprofit organizations, mutual associations, for-profit corporations, limited liability companies, states, local governments, territories, or possessions of the United States and Native American Tribes are eligible to apply.

TAX CREDITS AND BOND SUBSIDIES

Power

  • Section 48 Business Energy Investment Tax Credit (ITC):
    • Federal corporate tax credit for capital investments in renewable energy projects administered by the Internal Revenue Service (IRS) and documented in §48 of the IRS tax code.
    • Enacted in 2006. Current incentive is 26% for solar, fuel cells, small wind; 10% for geothermal, microturbines, and combined heat and power (CHP).
    • Expiration dates are based on when construction began.
    • The Consolidated Appropriations Act, signed in December 2015, included several amendments to this credit that applied only to solar technologies and PTC-eligible technologies. However, the Bipartisan Budget Act of 2018 reinstated this tax credit for the remaining technologies that have historically been eligible for the credit.
  • Renewable Electricity Production Tax Credit (PTC):
    • Available to wind facilities commencing construction by December 31, 2019 and all other qualifying facilities commencing construction by January 1, 2018. Value of the credit for wind stepped down in 2017, 2018, and 2019.
    • Tax credit is $0.015/kWh in 1993 dollars and is adjusted for inflation by multiplying the tax credit by the inflation adjustment factor. The estimated 2020 tax credit is $0.015/kWh.
    • Originally enacted in 1992. Has been renewed and expanded numerous times, most recently by ARRA (2009), the American Taxpayer Relief Act of 2012, the Tax Increase Prevention Act of 2014, the Consolidated Appropriations Act of 2016, and the Bipartisan Budget Act of 2018.
  • 45Q Tax Credit:
    • Establishes a tax credit on a per-ton basis of sequestered CO2. During the period 2008–2018, the incentive was $20 per metric ton for CO2 storage and $10 per metric ton for CO2 used for enhanced oil recovery (EOR) or natural gas recovery (NGR).
    • In February 2018, the Bipartisan Budget Act amended the tax credit and increased it for new facilities that are in service whose construction begins January 1, 2024 for a 12-year period. The new credit is up to $35 per metric ton for EOR and non-EOR CO2 air capture projects, with credit increasing until 2026, and $50 per metric ton for CO2 storage, with the credit increasing until 2026.

Vehicles and Fuels

  • Section 30D Plug-In Electric Vehicle Credit:
    • Enacted in the Energy Improvement and Extension Act of 2008. ARRA amended the tax credit in 2009 to include vehicles purchased after 2010.
    • Available for the purchase of a new qualified plug-in electric vehicle that uses an external source of energy to recharge the battery, and meets specific emissions standards.
    • Credit can range from $2,500 to $7,500, but this could vary based on battery capacity.
    • Credit begins to phase out for manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States. As of January 2020, Tesla vehicles are no longer eligible for the tax credit. As of March 2020, GM vehicles are no longer eligible.
  • Alternative Fuel Infrastructure Tax Credit:

Residential Upgrades

  • Section 25D Residential Renewable Energy Tax Credit:
    • Taxpayer may claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the United States that is owned and used as a residence by the taxpayer. Expenditures include labor costs for on-site preparation, assembly, or original system installation, and for piping or wiring to interconnect a system to the home.
    • Incentive amount is 26% of cost and includes: solar water heat, solar photovoltaics, geothermal heat pumps, wind (small), and fuel cells using renewable fuels.
    • The Bipartisan Budget Act of 2018 reinstated the tax credit for fuel cells, small wind, and geothermal heat pumps. The tax credit for all technologies now features a gradual step down in the credit value.
    • Residential Energy Efficiency Tax Credit:
      • The Bipartisan Budget Act of 2018 reinstated this tax credit for purchases made in 2017. Any qualified equipment installed prior to January 1, 2018 is eligible.
      • Applies to energy-efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling, and water-heating equipment.
  • Maximum tax credit for all improvements made during the period 2011–2016 is $500. Cap includes tax credits for any improvements made in any previous year.
  • Low-Income Housing Tax Credit (LIHTC):
    • Subsidizes the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants.
    • Enacted as part of the Tax Reform Act of 1986 and has been modified numerous times.
    • Federal government issues tax credits to state and territorial governments. State housing agencies then award the credits to private developers of affordable rental housing projects through a competitive process. Developers generally sell the credits to private investors to obtain funding. Once the housing project is placed in service (essentially, made available to tenants), investors can claim the LIHTC over a 10-year period.
    • Since the mid-1990s, it has supported the construction or rehabilitation of about 110,000 affordable rental units each year—over 2 million units in all since its inception.

Manufacturing

  • Section 48C Advanced Manufacturing Tax Credit:
    • In 2009 through ARRA, Congress provided $2.3 billion for a 30% tax credit that supported 183 domestic clean energy manufacturing facilities and thousands of jobs.
    • DOE and the U.S. Department of the Treasury worked in partnership to develop, launch, and award the funds for the program.
    • Qualifying manufacturing facilities included the production of: solar, wind, geothermal, or other renewable energy equipment; electric grids and storage for renewables; fuel cells and microturbines; energy storage systems for electric or hybrid vehicles; CO2 capture and sequestration equipment; equipment for refining or blending renewable fuels; and equipment for energy conservation, including lighting and smart grid technologies.

Agriculture

  • Federal Research and Development Tax Credits:
    • Federal government’s primary means for rewarding business for investment in research.
    • The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) permanently extended the research and development (R&D) tax credit and expanded its provisions.
    • Would need to be expanded to include improved products and processes like regenerative agriculture and healthy soil practices.

Energy and Resiliency Bond Subsidies

  • Qualified Energy Conservation Bonds (QECBs):
    • Federally subsidized bonds that finance energy efficiency and renewable energy projects at the state and local level. Authorized by Congress in the Energy Improvement and Extension Act of 2008 (EISA), which authorized $800 million bonds across the country.
    • In 2009, ARRA increased the QECBs to $3.2 billion to go towards states, territories, and local governments.
    • States have used QECBs to fund a number of projects that included but are not limited to: green community programs, rural development, renewable energy facilities, mass commuting projects, and a reduction of energy in state buildings by at least 20%.
    • The Tax Cuts and Jobs Act of 2017 eliminated QECBs in 2018.
  • The Energy Improvement and Extension Act of 2008 allotted $800 million in new CREBs. ARRA added $1.6 billion into new CREBs. The Tax Cuts and Jobs Act of 2017 repealed section 54C of the Internal Revenue Code, which authorized the use of CREBs.
  • Was mostly applicable for the public sector (e.g., state/local government, schools) to finance renewable energy projects.

Beyond federal funding for climate-related programs, there are opportunities for Nevada to generate resources to support climate action by pricing carbon.

Beyond federal funding for climate-related programs, there are opportunities for Nevada to generate resources to support climate action by pricing carbon. 

Implementing market-oriented solutions to address environmental issues is not a novel concept. In 1990, for example, a national cap-and-trade program for sulfur dioxide emissions from power plants was included in the Clean Air Act to reduce acid rain. Since 2005, a number of U.S. states have explored and/or implemented a variety of mechanisms that would put a price on carbon in order to reduce GHG emissions while also providing baseline resources to support climate action. These a low carbon fuel standard (LCFS) for transportation fuels, carbon taxes, and cap-and-trade programs. 

Financing Incentives for Technology Adoption: Green Banks

Incentives have proven a useful tool for supporting market adoption of new technologies intended to reduce GHG emissions. These include grants, bonds, loans, tax credits, rebates, and other creative solutions such as performance contracting, property-assessed clean energy (PACE), and revolving loan funds that reduce upfront costs. The implementation of green banks has served an important role in supporting these investments. In Nevada, the Nevada Clean Energy Fund is a green bank focused on acceleration of clean energy technology. The National Climate Bank Act introduced by Senators Markey and Van Hollen and Representative Debbie Dingell in 2019, was included in the Clean Future Act climate legislation package introduced by Energy & Commerce Committee Chairman Frank Pallone. The National Climate Bank can create over 5 million jobs and will be provided $20 billion as part of the $1.5 trillion Moving Forward Act. (Source: National Climate Bank Fact Sheet, provided by Coalition for Green Capital)

Both cap-and-trade and carbon taxes can be deployed to reduce GHG emissions, but the mechanics of how they incentivize reductions varies. The fundamental difference between a carbon tax and a cap-and-trade program is that the former sets the price and lets the market determine the quantity of emissions, while the latter sets a firm cap on emissions and the market determines the price.

As summarized by the Center for Climate and Energy Solutions, “Each approach has its vocal supporters. Those in favor of cap-and-trade argue that it is the only approach that can guarantee that an environmental objective will be achieved, has been shown to effectively work to protect the environment at lower than expected costs, and is politically more attractive. Those supporting a carbon tax argue that it is a better approach because it is transparent, minimizes the involvement of government, and avoids the creation of new markets subject to manipulation (C2ES 2009).”

A cap-and-trade approach (also called cap-and-invest) sets a firm cap on emissions from one or more sectors that declines over time. Compliance entities, such as a power plant, must secure carbon allowances equal to their emissions. State regulators can sell these allowances through an auction platform, generating auction proceeds. The proceeds can then be reinvested to support state climate action priorities. The key feature of this type of system is a mechanism that decreases the total allowable emissions total over time, which means less allowances available per auction.

Both options leverage market drivers in order to reconcile the negative impacts of GHG emissions. Both can also be designed to avoid disproportionate impacts on vulnerable communities, and proceeds can be directed at investments that directly support disadvantaged and marginalized populations.

Thus far, no U.S. states have adopted the tax option, although the State of Washington tried twice to implement a carbon tax through ballot measures. British Columbia, Canada, instituted a revenue-neutral carbon tax of $10 CAD per tonne of CO2e in 2008 that gradually rose to $40 CAD per tonne CAD in 2019.

Beginning in the early to mid-2000s, a number of U.S. states and Canadian provinces began pursuing cap-and-trade programs. The Regional Greenhouse Gas Initiative (RGGI) formed in the Northeast and Mid-Atlantic, while the Western Climate Initiative (WCI) formed in the West.

RGGI has been successfully implementing a linked, interstate carbon market for the electric power sector since 2008 and is the first established market-based mechanism to control GHGs in the United States. This initiative established a cap-and-trade program for the power sector across 10 Eastern states in the Northeast and Mid-Atlantic: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. (Virginia will become the 11th state to join in January 2021 and Pennsylvania is currently developing their regulations with a plan to join in 2022). Power plants larger than 25 MW are required to hold allowances equivalent to their GHG emissions and to surrender those allowances at the end of each three-year compliance period. According to the RGGI website: “A CO2 allowance represents a limited authorization to emit one short ton of CO2 from a regulated source, as issued by a participating state. Regulated power plants can use a CO2 allowance issued by any participating state to demonstrate compliance in any state. They may acquire allowances by purchasing them at regional auctions, or through secondary markets.”

Proceeds generated are re-invested in participating states to support state-specific climate action goals. These include re-investing in projects that support energy efficiency, clean energy and transportation, enhancement of natural and working lands, community adaptation and resilience, and the creation of state green banks. In 2018, RGGI realized $248 million in proceeds.

Beyond the revenue generated to support state climate priorities, RGGI has achieved a 50% reduction in power-sector GHG emissions while GDP across the participating states continues to grow (RGGI, 2020). The market has also significantly improved the health of children across the region, avoiding more than 500 pediatric asthma cases and 100 preterm births, with associated avoided costs in the range of $191–$350 million (NIH, 2020).

Building on the success of RGGI, a number of RGGI states—with the addition of Virginia, Pennsylvania, and the District of Columbia—are working to “design a regional low-carbon transportation policy proposal that would cap and reduce carbon emissions from the combustion of transportation fuels.” The Transportation & Climate Initiative (TCI) is currently undergoing its policy design process, with a final memorandum of understanding planned for release in 2020 and a model rule for winter 2020–2021.

Initiated in 2013, California’s cap-and-trade program, administered by the WCI, covers 85% of the state’s total GHG emissions and is the only multi-sector cap-and-trade program in the U.S. As with RGGI, statewide limits are placed on GHG emissions with the cap declining over time, as well as similar allowance and auction processes. However, one difference is that the California cap-and-trade program incorporates a floor price for allowances that increases over time. This “creates a steady and sustained carbon price signal to prompt action to reduce GHG emissions.

Auction proceeds from California’s cap-and-trade program contribute to the state’s Greenhouse Gas Reduction Fund, which are in turn allocated to the California Climate Investments programs. Projects funded by these programs include energy efficiency installations, land restoration, urban tree planting, rebate programs, and many other initiatives designed to further reduce California’s GHG emissions. In 2019, $5.3 billion in projects were supported across the state, including in excess of $1 billion for new projects in California’s disadvantaged communities (CCI 2020).

In 2014, the California cap-and-trade program linked with the program in Quebec. For a brief period in early 2018, Ontario also joined the network. However, in July 2018, Ontario’s government revoked their cap-and-trade regulation. Nevertheless, the California-Quebec Cap-and-Trade Program continues.

Although an important tool, carbon pricing alone is insufficient to reach net-zero targets by mid-century. To be fully effective, market-based solutions should be used with additional, complementary mitigation-focused policies (WRI, 2019; CGEP, 2020). This suite of supporting policies must be unique to the carbon-pricing market in place. For these reasons, it is critical to establish a framework (e.g., CGEP, 2019) that will identify the policies that dovetail with and bolster an appropriate carbon price solution.