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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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    Cited by:
    1. Lanz, Bruno & Rausch, Sebastian, 2011. "General equilibrium, electricity generation technologies and the cost of carbon abatement: A structural sensitivity analysis," Energy Economics, Elsevier, Elsevier, vol. 33(5), pages 1035-1047, September.
    2. Bushnell, James & Chong, Howard G. & Mansur, Erin T., 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," Staff General Research Papers, Iowa State University, Department of Economics 13139, Iowa State University, Department of Economics.
    3. 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.
    4. Fischer, Carolyn & Springborn, Michael R., 2009. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers, Resources For the Future dp-09-47, Resources For the Future.
    5. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series, The World Bank 6859, The World Bank.
    6. Lawrence H. Goulder, 2013. "Markets for Pollution Allowances: What Are the (New) Lessons?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 27(1), pages 87-102, Winter.
    7. Goulder, Lawrence H., 2013. "Climate change policy's interactions with the tax system," Energy Economics, Elsevier, Elsevier, vol. 40(S1), pages S3-S11.
    8. Lawrence H. Goulder & Marc A. C. Hafstead & Roberton C. Williams III, 2014. "General Equilibrium Impacts of a Federal Clean Energy Standard," NBER Working Papers 19847, National Bureau of Economic Research, Inc.
    9. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
    10. David Anthoff & Robert Hahn, 2010. "Government failure and market failure: on the inefficiency of environmental and energy policy," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 26(2), pages 197-224, Summer.
    11. Valentina Bosetti & Marco Maffezzoli, 2014. "Occasionally binding emission caps and real business cycles," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 523, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    12. 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, Elsevier, vol. 57(C), pages 61-67.
    13. Clémence Christin & Jean-Philippe Nicolai & Jerome Pouyet, 2013. "Pollution Permits, Imperfect Competition and Abatement Technologies," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 13/186, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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