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Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap

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

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Abstract

Policies to cap emissions of carbon dioxide (CO2) in the U.S. economy could pose significant costs on the electricity sector, which contributes roughly 40 percent of total CO2 emissions in the U.S. Using a detailed simulation model of the electricity sector, we evaluate alternative ways that emission allowances can be allocated. Most previous emissions trading programs have allocated the major portion of allowances for free to incumbent firms. In the electricity sector this approach would lead to changes in electricity price that vary by region primarily based primarily on whether prices are market-based or determined by cost-of-service regulation. Allocation to customers, which could be achieved by allocation to local distribution companies (retail utilities) would recover symmetry in the effect of free allocation and lead to signficiantly lower overall electricity prices. However, this form of compensation comes with an efficiency cost that will increase the overall cost of climate policy.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-25.

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Date of creation: 16 Jul 2008
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Handle: RePEc:rff:dpaper:dp-08-25

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Related research
Keywords: emissions trading; allowance allocations; electricity; air pollution; auction; grandfathering; cost-effectiveness; greenhouse gases; climate change; global warming; carbon dioxide; asset value; compensation;

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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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  1. Fischer, Carolyn & Fox, Alan, 2004. "Output-Based Allocations of Emissions Permits: Efficiency and Distributional Effects in a General Equilibrium Setting with Taxes and Trade," Discussion Papers dp-04-37, Resources For the Future. [Downloadable!]
  2. 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!]
    Other versions:
  3. 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!]
  4. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September. [Downloadable!] (restricted)
    Other versions:
  5. Matthew Riddle & James Boyce, 2007. "Cap and Dividend: How to Curb Global Warming while Protecting the Incomes of American Families," Working Papers wp150, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  6. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January. [Downloadable!] (restricted)
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  7. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future. [Downloadable!]
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  8. Ahman, Markus & Burtraw, Dallas & Kruger, Joseph & Zetterberg, Lars, 2007. "A Ten-Year Rule to guide the allocation of EU emission allowances," Energy Policy, Elsevier, vol. 35(3), pages 1718-1730, March. [Downloadable!] (restricted)
  9. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," Discussion Papers dp-01-30-, Resources For the Future. [Downloadable!]
  10. S. Paltsev & J. Reilly & H. Jacoby & A. Gurgel & G. Metcalf & A. Sokolov & J. Holak, 2007. "Assessment of U.S. Cap-and-Trade Proposals," Working Papers 0705, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
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  11. Ruth, Matthias & Gabriel, Steven A. & Palmer, Karen L. & Burtraw, Dallas & Paul, Anthony & Chen, Yihsu & Hobbs, Benjamin F. & Irani, Daraius & Michael, Jeffrey & Ross, Kim M. & Conklin, Russell & Mill, 2008. "Economic and energy impacts from participation in the regional greenhouse gas initiative: A case study of the State of Maryland," Energy Policy, Elsevier, vol. 36(6), pages 2279-2289, June. [Downloadable!] (restricted)
  12. Ian W.H. Parry, 2005. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 849-869, Winter.
    Other versions:
  13. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September. [Downloadable!] (restricted)
  14. Rosendahl, Knut Einar, 2008. "Incentives and prices in an emissions trading scheme with updating," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 69-82, July. [Downloadable!] (restricted)
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