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Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program

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  • Goulder, Lawrence H.
  • Hafstead, Marc A.C.
  • Dworsky, Michael
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    Abstract

    This paper examines the implications of alternative allowance allocation designs for industry profits and GDP under a federal cap-and-trade program to reduce greenhouse gas emissions. We employ a general equilibrium model of the U.S. economy with a unique treatment of capital dynamics that permits close attention to profit impacts. Effects on profits depend critically on the relative reliance on auctioning or free allocation of allowances. Freely allocating fewer than 15% of the emissions allowances generally suffices to prevent profit losses in the most vulnerable U.S. industries. Freely allocating all of the allowances substantially overcompensates these industries. When emissions allowances are auctioned and the proceeds employed to finance cuts in income tax rates, GDP costs are about 33% lower than when all allowances are freely allocated. Our results are robust to policies differing in stringency, the availability of offsets, and the opportunities for intertermporal trading of allowances.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

    Volume (Year): 60 (2010)
    Issue (Month): 3 (November)
    Pages: 161-181

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    Handle: RePEc:eee:jeeman:v:60:y:2010:i:3:p:161-181

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    Web page: http://www.elsevier.com/locate/inca/622870

    Related research

    Keywords: Climate policy Cap and trade Emissions allowance allocation General equilibrium modeling Industry impacts;

    References

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    8. Ian W. H. Parry, 2003. "Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 385-399.
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    Cited by:
    1. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
    2. Lanz, Bruno & Rausch, Sebastian, 2011. "General equilibrium, electricity generation technologies and the cost of carbon abatement: A structural sensitivity analysis," Energy Economics, Elsevier, vol. 33(5), pages 1035-1047, September.
    3. Anthoff, David & Hahn, Robert W., 2009. "Government Failure and Market Failure: On the Inefficiency of Environmental and Energy Policy," Working paper 6, Regulation2point0.
    4. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.
    5. Goulder, Lawrence H. & Hafstead, Marc A.C. & Williams, Roberton C., 2014. "General Equilibrium Impacts of a Federal Clean Energy Standard," Discussion Papers dp-14-02, Resources For the Future.
    6. Pezzey, John C.V. & Jotzo, Frank, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Research Reports 95049, Australian National University, Environmental Economics Research Hub.
    7. James B. Bushnell & Howard Chong & Erin T. Mansur, 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," NBER Working Papers 15572, National Bureau of Economic Research, Inc.
    8. Clémence Christin & Jean-Philippe Nicolai & Jerome Pouyet, 2013. "Pollution Permits, Imperfect Competition and Abatement Technologies," CER-ETH Economics working paper series 13/186, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    9. Lawrence H. Goulder, 2013. "Markets for Pollution Allowances: What Are the (New) Lessons?," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 87-102, Winter.
    10. Goulder, Lawrence H., 2013. "Climate change policy's interactions with the tax system," Energy Economics, Elsevier, vol. 40(S1), pages S3-S11.
    11. Du, Shaofu & Zhu, Lili & Liang, Liang & Ma, Fang, 2013. "Emission-dependent supply chain and environment-policy-making in the ‘cap-and-trade’ system," Energy Policy, Elsevier, vol. 57(C), pages 61-67.
    12. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.

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