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Upstream vs. Downstream CO2 Trading: A Comparison for the Electricity Context

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Author Info

  • Hobbs, Benjamin
  • Bushnell, James
  • Wolak, Frank

Abstract

In electricity, “downstream†CO2�regulation requires retail suppliers to buy energy from a mix of sources so that their weighted emissions satisfy a standard. It has been argued that such “load-based†regulation would solve emissions leakage, cost consumers less, and provide more incentive for energy efficiency than traditional source-based cap-and-trade programs. Because pure load-based trading complicates spot power markets, variants (GEAC and CO2RC) that separate emissions attributes from energy have been proposed. When all generators and consumers come under such a system, these load-based programs are equivalent to source-based trading in which emissions allowances are allocated by various rules, and have no necessary cost advantage. The GEAC and CO2RC systems are equivalent to giving allowances free to generators, and requiring consumers either to subsidize generation or buy back excess allowances, respectively. As avoided energy costs under source-based and pure load-based trading are equal, the latter provides no additional incentive for energy efficiency. The speculative benefits of load-based systems are unjustified in light of their additional administrative complexity and cost, the threat that they pose to the competitiveness and efficiency of electricity spot markets, and the complications that would arise when transition to a federal cap-and-trade system occurs.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31184.

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Date of creation: 22 Apr 2010
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Publication status: Published in Energy Policy, July 2010, vol. 38 no. 7, pp. 3632-3643
Handle: RePEc:isu:genres:31184

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: Emissions trading; Greenhouse Gas regulation; Electricity market models;

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Cited by:
  1. Erin T. Mansur, 2011. "Upstream versus Downstream Implementation of Climate Policy," NBER Chapters, in: The Design and Implementation of U.S. Climate Policy, pages 179-193 National Bureau of Economic Research, Inc.

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