With an increasing American public desire to regulate carbon emissions from stationary and mobile sources, and with more states adopting renewable energy standards and green codes as an effort towards green environment initiatives, there is an imperative need to evaluate the effectiveness and equity implications of using different mechanisms to reduce carbon emissions. This paper presents a carbon regulation based duopoly models to evaluate the effectiveness and equity of various carbon policies including emission standards, carbon tax, and emissions trading in static and dynamics. An empirical analysis of the US housing industry is conducted to illustrate the impacts on the industrial production, market structure, technology selection. Especially, the analysis shows the market-based mechanisms outperform the emission standards in terms of effectively achieving emission targets while maintaining a stable industrial production.


Since the last century, the average global surface temperature has increased by 0.74±0.18°C (1.33 ± 0.32 F). The scientific consensus is that human-induced greenhouse gas emissions are the primary cause of global warming. Carbon dioxide is one of several heat-trapping greenhouse gases (GHGs) emitted by humans. This growing temperature has caused severe consequence, such as global climate change, sea level rise, massive flooding, landscape changes, and infectious diseases spread, etc. Failing to address climate change can also inflict considerable economic damages. According to the Stern Review on the Economics of Climate Change, global Gross Domestic Product (GDP) will reduce by roughly 5% annually for inaction on climate change. Under the most severe scenario, the loss could amount up to 20% of the world's economic output. By contrast, the cost of reducing GHG emissions (mainly CO2) and adapting to climate change could be limited to only 1% of global GDP annually.

World leaders have been collaborating closely to combat climate change and to reduce carbon emissions over the last two decades. The development led to the first global agreement in 1997, the Kyoto Protocol. The Kyoto Protocol set legally binding targets for 37 industrialized countries and the European community to reduce GHG emissions by 2012. More recently, over 110 countries signed on to the nonbinding Copenhagen Accord at the United Nations Climate Change Conference in 2009. The Copenhagen Accord emphasizes urgent climate change initiatives in accordance with the principles of common but differentiated responsibilities and respective capabilities, recognizes that the increase in global temperature should be less than 2 degrees Celsius, and commits to take actions to meet this objective consistent with science and on the basis of equity and finance plans.

Furthermore, both developed and developing countries have made strong commitments to reduce carbon emissions in a long term. The Obama Administration is committed to reduce carbon emissions by 17% below 2005 levels by 2020, 83% below by 2050. European Union countries unconditionally commit to adequately reduce their emissions by at least 20% below 1990 levels, and to conditionally reduce them by 30% below 1990 levels by 2020 if other developed countries and more advanced developing nations commit to comparable emission reductions. China pledges to reduce emissions per unit of economic output by 40–45% relative to 2005 levels. India is obligated to reduce its emission intensity by 20–25% by 2020. And Brazil aims to reduce emissions by 38–42% from business-as-usual levels by 2020. It is obvious that carbon intensive industries including power generation, petrochemical, transportation, and construction must be strictly regulated to successfully achieve these emission reduction targets.

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