Cost, innovation, and emissions leakage from overlapping climate policy

Jurisdictions have implemented a variety of policy instruments to mitigate greenhouse gas emissions. However, interactions between overlapping climate policies can lead to unintended impacts. This study demonstrates how interactions between an incomplete emissions cap and additional climate policy can result in higher emissions and higher average abatement costs relative to an emissions cap alone. This sectoral policy emissions displacement effect is then quantified through simulations using a computable general equilibrium model for the case of California's low-carbon fuel standard (LCFS) and cap-and-trade program. Emissions increase as a result of the LCFS incentivizing greater production of alternative transportation fuels with emissions not covered by the emissions cap. Emissions leakage can be mitigated by incorporating elements of a fixed-price instrument (i.e. carbon tax) to improve policy complementarity or requiring an obligation for the lifecycle GHG emissions of fuels under the emissions cap. • Overlapping climate policies can unintentionally increase emissions and cost. • Simulations find that California's LCFS with CAT drives emissions leakage. • Leakage can be mitigated by regulating lifecycle GHG emissions under the cap. • Induced innovation from LCFS reduces but fails to offset higher policy costs. • Fixed-price instruments provide greater policy complementarity than fixed-quantity.