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The Effect of Allowance Allocation on the Cost of Carbon Emission Trading

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Author Info
Burtraw, Dallas () (Resources for the Future)
Palmer, Karen () (Resources for the Future)
Bharvirkar, Ranjit
Paul, Anthony

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Abstract

We investigate the cost-effectiveness and distributional effects of a revenue-raising auction, grandfathering, and a generation performance standard as alternative approaches for distributing carbon emission allowances in the electricity sector. We solve a detailed national electricity market model and find the auction is roughly one-half the societal cost of the other approaches. This result holds under a variety of assumptions about the future state of economic regulation and competition in the electricity sector. The differences in the cost of the approaches flow from the effect of each approach on electricity price. Grandfathering is the best for producers but it imposes a substantial cost on consumers. The generation performance standard yields the lowest electricity price but highest natural gas price. The auction does better than the generation performance standard at protecting households and at preserving asset values for producers. It also yields revenues that can help meet other efficiency and distributional goals.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-01-30-.

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Date of creation: 01 Aug 2001
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Related research
Keywords: carbon emission allowance trading allowance allocations electricity restructuring air pollution safety valve auction grandfathering generation performance standard output-based allocation cost-effectiveness

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Find related papers by JEL classification:
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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  10. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "Cost-Effective Reduction of NOx Emissions from Electricity Generation," Discussion Papers dp-00-55-rev, Resources For the Future. [Downloadable!]
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  1. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers dp-06-49, Resources For the Future. [Downloadable!]
  2. Pizer, William & Kruger, Joseph, 2004. "The EU Emissions Trading Directive: Opportunities and Potential Pitfalls," Discussion Papers dp-04-24, Resources For the Future. [Downloadable!]
  3. Burtraw, Dallas, . "State Efforts to Cap the Commons: Regulating Sources or Consumers?," Discussion Papers dp-07-49, Resources For the Future. [Downloadable!]
  4. Burtraw, Dallas & Palmer, Karen & Kahn, Daniel, 2005. "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program," Discussion Papers dp-05-25, Resources For the Future. [Downloadable!]
  5. Macauley, Molly & Shih, Jhih-Shyang, 2003. "Effects of Carbon Policies and Technology Change," Discussion Papers dp-03-14, Resources For the Future. [Downloadable!]
  6. Chernyavs’ka, Liliya & Gullì, Francesco, 2007. "Interaction of carbon and electricity prices under imperfect competition," MPRA Paper 5866, University Library of Munich, Germany. [Downloadable!]
  7. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," Discussion Papers dp-02-15-, Resources For the Future. [Downloadable!]
  8. Parry, Ian W.H. & Goulder, Lawrence H., 2008. "Instrument Choice in Environmental Policy," Discussion Papers dp-08-07, Resources For the Future. [Downloadable!]
  9. Kruger, Joseph, 2005. "From SO2 to Greenhouse Gases: Trends and Events Shaping Future Emissions Trading Programs in the United States," Discussion Papers dp-05-20, Resources For the Future. [Downloadable!]
  10. Burtraw, Dallas & Bharvirkar, Ranjit & Bloyd, Cary, 2002. "Investment in Electricity Transmission and Ancillary Environmental Benefits," Discussion Papers dp-02-14-, Resources For the Future. [Downloadable!]
  11. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(3), pages 337-360, November. [Downloadable!] (restricted)
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  12. Bernard, Jean-Thomas & Cote, Bruno, 2002. "The Measurement of the Energy Intensity of Manufacturing Industries: A Principal Components Analysis," Discussion Papers dp-02-31, Resources For the Future. [Downloadable!]
  13. Burtraw, Dallas & Palmer, Karen, 2005. "The Environmental Impacts of Electricity Restructuring: Looking Back and Looking Forward," Discussion Papers dp-05-07, Resources For the Future. [Downloadable!]
  14. Palmer, Karen & Butraw, Dallas & Kahn, Danny, 2006. "Simple Rules for Targeting CO2 Allowance Allocations to Compensate Firms," Discussion Papers dp-06-28, Resources For the Future. [Downloadable!]
  15. Yazid Dissou, 2006. "Efficiency and Sectoral Distributional Impacts of Output-Based Emissions Allowances in Canada," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 5(1), pages 1506-1506. [Downloadable!] (restricted)
  16. Parry, Ian, 2004. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," Discussion Papers dp-04-27, Resources For the Future. [Downloadable!]
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  17. Burtraw, Dallas & Palmer, Karen, 2005. "Cost-Effectiveness of Renewable Electricity Policies," Discussion Papers dp-05-01, Resources For the Future. [Downloadable!]
    Other versions:
  18. Parry, Ian, 2003. "Are Emissions Permits Regressive?," Discussion Papers dp-03-21, Resources For the Future. [Downloadable!]
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  19. Burtraw, Dallas & Palmer, Karen & Banzhaf, H. Spencer, 2002. "Efficient Emission Fees in the U.S. Electricity Sector," Discussion Papers dp-02-45, Resources For the Future. [Downloadable!]
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  20. Burtraw, Dallas & Palmer, Karen & Krupnick, Alan & Toman, Michael & Paul, Anthony & Bloyd, Cary, 2001. "Ancillary Benefits of Reduced Air Pollution in the United States from Moderate Greenhouse Gas Mitigation Policies in the Electricity Sector," Discussion Papers dp-01-61-, Resources For the Future. [Downloadable!]
  21. Burtraw, Dallas & Evans, David A., 2008. "Tradable Rights to Emit Air Pollution," Discussion Papers dp-08-08, Resources For the Future. [Downloadable!]
  22. Morgenstern, Richard & Shih, Jhih-Shyang & Ho, Mun & Zhang, Xuehua, 2002. "The Near-Term Impacts of Carbon Mitigation Policies on Manufacturing Industries," Discussion Papers dp-02-06-, Resources For the Future. [Downloadable!]
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  23. Burtraw, Dallas & Palmer, Karen & Kahn, Daniel, 2005. "CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors," Discussion Papers dp-05-55, Resources For the Future. [Downloadable!]
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