To address climate change, jurisdictions have implemented a variety of policy instruments to mitigate greenhouse gas emissions. However, the use of overlapping climate policies may lead to unintended interactions that can undermine policy objectives. This study examines how interactions between two policies implemented in California – the low-carbon fuel standard (LCFS) and cap-and-trade (CAT) program – impact abatement costs, innovation, and total emissions. Previous research has shown how additional policies, when applied to a sector covered by a cap-and-trade program, are unlikely to create additional emissions abatement. In this study, I demonstrate how the use of an LCFS in combination with a CAT program can lead to an increase in net emissions as well as higher average abatement costs, relative to a CAT alone.

These undesirable outcomes occur as a result of two dynamics: (i) using additional policy to force high-cost abatement from a sector that is covered under the emissions cap increases total policy costs without altering total abatement achieved under the cap, and (ii) when additional policy incentivizes the production of fuels which generate emissions in sectors not covered by the cap, the net emissions impact from the policy combination depends on the change in emissions outside of the cap.

To estimate the magnitude of these effects, I simulate a range of policy scenarios using a computable general equilibrium model for California developed for this study. Results suggest that the overlapping policy approach can result in 2.4% higher total emissions and 9% higher average abatement costs from 2015 to 2030, relative to a scenario with an emissions cap alone. While induced technological change from the LCFS lowers policy costs, particularly from lower production costs of bio-based fuels, it is unlikely to offset the higher efficiency costs from overlapping regulation. The impact of policy design elements including the CAT program's price floor and ceiling as well as policy alternatives capable of mitigating the negative interaction effects are also explored.