How Do Performance Standards Work?
A law or regulation establishes the performance standard for particular categories of products, energy sources, equipment, facilities, portfolios, fleets or companies. A government agency requires companies who produce or distribute products or energy or operate equipment or facilities to comply with the standards. Standards can include varying types and degrees of flexibility.
What Is a Climate-Relevant Performance Standard?
A climate-related performance standard establishes a goal that must be achieved by a regulated entity . For example, it may require a specified rate or intensity of greenhouse gas (GHG) emissions, or the use of a specified amount of renewable or low-carbon energy sources. Performance standards leave compliance choices up to the company to decide how it will meet the standard. . Conversely, technology or design standards are prescriptive (i.e., command-and-control) policies that dictate the necessary approach to achieve the environmental goal.
On this page, we provide a general overview of performance standards. A few policies that fit under this category are so distinct that they also have their own pages. These include Clean Electricity Standards, Low-Carbon Fuel Standards, Renewable Fuel Standards, ZEV Mandates, and more.
What are Key Performance Standard Design Considerations?
In establishing a standard, a legislature or agency must answer the following design questions:
Standards could apply to specific products, energy sources, equipment, facilities, portfolios or fleets, or companies. The narrower the application, the more certain policymakers can be of the outcome; however, broader applications (e.g., a fleetwide zero-emissions vehicle standard) can enable more room for innovation.
The policy must set a performance threshold in terms of emissions, energy efficiency, or use of particular energy resources.
A standard must determine whether the entities that produce or distribute products or energy (e.g., fossil fuel producers), or those who operate equipment or facilities (e.g., power plants), are required to comply.
Standards might set a single compliance date (e.g., 5 years from enactment or promulgation) or multiple deadlines.
The performance could be measured by a certain emissions rate, such as tons of GHG emissions per Mega-Watt Hour [MWH] produced, or a limit on total emissions, such as annual tons of GHG emitted.
This last question of compliance flexibility merits elaboration. The degree of compliance flexibility is a key design decision because flexibility allows companies to figure out how to achieve a standard at the least cost. Compliance flexibility comes in many forms. One form is the flexibility of the standard with respect to the means of achieving the energy or GHG performance outcome. The word “performance” generally implies an outcome-based standard, rather than a specific technology, which allows companies to figure out how to achieve them.
If the standard is specified in terms of performance, one form of flexibility is allowing “averaging” of the performance of multiple products, appliances, pieces of equipment, or facilities across portfolios, fleets or companies. Another form of flexibility is “credit trading,” in which companies can earn “tradeable credits” for overcompliance with respect to some parts of their portfolio or fleet. They can not only use these credits to offset their own undercompliance in other parts of their own portfolios or fleets, but also sell them to other companies to offset their undercompliance. A third form of flexibility is establishing the standard at the fleet or portfolio level, which in effect is similar to averaging. A fourth form of flexibility is establishing performance standards at the corporate level, giving the regulated company many degrees of freedom in achieving them.
Legislatures and/or regulators generally specify performance-standard design based on one or more of the following criteria:
- The societal benefits of reducing GHG emissions, (e.g.,improved public health, avoided climate impacts, diversification of energy supply and clean energy job growth), reducing energy use, and/or shifting to alternative energy sources.
- Technical feasibility of achieving the standard
- Compliance cost to companies who must comply with the standards
- Societal co-benefits or knock-on effects of achieving the standards
Establishing standards in accordance with these criteria generally requires detailed technology assessment and cost-benefit analysis.
U.S. Experience with Performance Standards
Several U.S. energy and environmental statutes require federal agencies to set performance standards, and many U.S. states set such standards as well. For example, under the Energy Policy and Conservation Act (EPCA), the U.S Department of Energy (DOE) sets energy efficiency standards for appliances such as refrigerators and washing machines, and for equipment such as motors. DOE’s appliance and equipment efficiency standards apply to each and every appliance and piece of equipment that they cover. Also under EPCA, the U.S. Department of Transportation’s National Highway Traffic and Safety Administration (NHTSA) sets fuel efficiency standards for vehicles. These standards, called Corporate Average Fuel Economy (CAFE) standards, allow auto manufacturers to comply on a fleetwide, rather than an individual vehicle, basis. States and localities establish energy efficiency building codes, often based on DOE model building codes, that apply to every building. Many states set renewable portfolio standards, or clean energy standards, which require power companies to ensure that a specified percentage of the power they sell is generated using renewable energy or clean energy.
Under the Clean Air Act, the U.S. Environmental Protection Agency (EPA) sets GHG emissions standards for powerplants, industrial facilities, and vehicles. EPA also sets renewable fuel standards, and California sets its own low-carbon fuel standards, that apply to each fuel producer. California also sets its own vehicle standards, including zero-emission vehicle standards that specify the percentage of vehicles sold that must be zero-emitting. EPA’s and California’s vehicle and fuel standards allow credit trading. EPA’s 2015 Clean Power Plan (GHG standards for powerplants) was performance-based, allowed power companies to determine the means of compliance, and allowed emissions trading.