Emission Reduction Through Regulating Indirect Sources

Problem definition: Emissions from diesel semitrucks, such as nitrogen oxides, have contributed significantly to air pollution, prompting government intervention. However, directly regulating trucking companies’ diesel truck usage often falls outside the jurisdiction of local governments. A legislative alternative is to regulate other sectors within the local region that indirectly drive diesel truck usage, referred to as indirect emission sources. The first of such regulations is Southern California’s Rule 2305, the warehouse indirect source rule (ISR), which holds warehouses accountable for the diesel truck visits to their facilities via a mitigation fee. The goal is to incentivize the adoption of electric semitrucks and reduce air pollution. Motivated by this policy shift, we examine the effectiveness of the ISR, focusing on its environmental impact and the industry burden that it imposes compared with a hypothetical direct source rule (DSR) that would regulate trucking companies directly. Methodology/results: We develop game theory models to analyze the decision-making process of warehouses and trucking companies under both the ISR and the DSR. Our findings suggest that the ISR has the potential to encourage greater adoption of electric semitrucks while reducing the industry’s cost burden, particularly when mitigation fees for diesel truck trips are kept low. However, the current ISR practice of using mitigation fees to subsidize electric semitruck investments for trucking companies may backfire, potentially hindering electric truck adoption. Factors including competition in the trucking sector and regional characteristics, such as truck trip distance distributions, can either exacerbate or alleviate these effects. Managerial implications: Our results indicate that the ISR can be an effective tool for emissions control. However, governments must carefully consider potential unintended consequences when designing and implementing such policies. We further contextualize our findings using real warehouse data from Southern California. Funding: S. Zhao acknowledges financial support from the National Natural Science Foundation of China [Grants 72502233, 72325008]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0615 .