Abstract: We explore the performance of an addition to U.S. climate policy using authority under Section 115 of the Clean Air Act, with special attention to distributional effects among the states. This portion of the Act concerns trans-boundary air pollution, and under its provisions a national greenhouse target could be allocated among the states, with the details of state implementation optionally guided by a model rule as under other provisions of the Act. With trading allowed among the states, such a measure could lead to a national price on the covered gases. While we adopt features of a possible Section 115 implementation, the analysis is applicable to similar cap-and-trade programs that might be adopted under other authorities.

We investigate the implications of such a policy using MIT’s U.S. Regional Energy Policy (USREP) model, with its electric sector replaced by the Renewable Energy Development System (ReEDS) model developed by the U.S. National Renewable Energy Laboratory. Existing federal and state climate policies are assumed to remain in place, and a national constraint on CO₂ emissions is applied to achieve 45% or 50% reductions below the 2005 level by 2030. We apply the policies in a Baseline and a Low-Cost Baseline, the latter with more aggressive assumptions of technology cost improvements. The U.S. is aggregated to 18 individual states and 12 multi-state regions, and the effects of the national emissions restriction are investigated under three alternative methods by which the EPA might allocate these targets among the states.

We find the cost of achieving either target to be modest - allowing for nearly identical economic growth, even without taking account of air quality and climate benefits. The alternative allocation methods generate varying per capita revenue outcomes among states and regions and drive most of the welfare impact through a direct income effect. It is assumed that states distribute permit revenue to their residents in equal lump-sum payments, which leads to net benefits to lower income households. Under the Low-Cost Baseline, carbon prices in 2030 are about ⅓ those in the Baseline, and the welfare effects are negligible. Considering climate benefits evaluated using the social cost of carbon and particulate matter air pollution health benefits, less the mitigation costs, we find net benefits to the U.S. in all cases, with slightly larger net benefits with the 50% reduction below 2005 emissions.