This issue brief evaluates five approaches to account for state-achieved reductions and address the state-to-state “leakage” problem under a federal cap-and-trade program.
In the United States, state governments have been leaders in addressing climate change through a wide range of energy, environmental, land use and transportation policies. As the United States Congress moves closer to enacting federal cap-and-trade legislation for greenhouse gases, lawmakers should carefully consider how to preserve robust state action. If states are to continue to innovate and achieve reductions in emissions from capped entities after a federal cap-and-trade program is implemented, such state action will need to be accounted for within the federal program. In practical terms, this will require retiring federal greenhouse gas emission allowances, rendering them ineligible for trading or future use, to reflect state-achieved reductions. If allowances are not retired to reflect these emission reductions, then state actions would merely free up allowances for sale in another state, resulting in no net environmental benefit from state actions. This dynamic is sometimes referred to as emissions “leakage.”