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Allocation and Leakage in Regional Cap-And-Trade Markets for CO2

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  • Bushnell, James
  • Chen, Yihsu

Abstract

The allocation or assignment of emissions allowances is among the most contentious elements of the design of emissions trading systems. �Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. �In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. �Several proposals involve the ``updating'' of allowance allocation, where the allocation is tied to the ongoing output of plants. �These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. �However, �some forms of allocation updating can also inflate allowance prices, thereby limiting the benefits of such schemes to high emissions firms. � Thus, the anticipated benefits from allocation updating can be diluted and further distortions introduced into the trading system.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31804.

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Date of creation: 02 Jul 2010
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Handle: RePEc:isu:genres:31804

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Web page: http://www.econ.iastate.edu
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Keywords: electricity markets; Cap-and-Trade; Emissions Leakage;

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  1. Neuhoff, K. & Keats, K. & Sato, M., 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0642, Faculty of Economics, University of Cambridge.
  2. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers, Resources For the Future dp-06-49, Resources For the Future.
  3. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
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