IDEAS home Printed from https://ideas.repec.org/a/eee/resene/v34y2012i4p647-668.html
   My bibliography  Save this article

Allocation and leakage in regional cap-and-trade markets for CO2

Author

Listed:
  • Bushnell, James
  • Chen, Yihsu

Abstract

The allocation or assignment of the emissions permits is one of the most contentious elements of the design of cap-and-trade systems In this paper we develop a detailed representation of the U.S. western electricity market to assess the potential impacts of various permit allocation proposals. Several proposals involve the “updating” of allocations, where the allocation is tied to the ongoing output, or input use, 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, allocation updating can also inflate permit prices, thereby limiting the benefits of such schemes to high emissions firms.

Suggested Citation

  • Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
  • Handle: RePEc:eee:resene:v:34:y:2012:i:4:p:647-668
    DOI: 10.1016/j.reseneeco.2012.05.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0928765512000413
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
    2. Fullerton, Don & Metcalf, Gilbert E., 2001. "Environmental controls, scarcity rents, and pre-existing distortions," Journal of Public Economics, Elsevier, vol. 80(2), pages 249-267, May.
    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.
    4. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
    5. Cathrine Hagem & Hege Westskog, 2008. "Intertemporal Emission Trading with a Dominant Agent: How does a Restriction on Borrowing Affect Efficiency?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(2), pages 217-232, June.
    6. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2009. "Greenhouse Gas Reductions under Low Carbon Fuel Standards?," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 106-146, February.
    7. Don Fullerton & Garth Heutel, 2010. "The General Equilibrium Incidence of Environmental Mandates," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 64-89, August.
    8. Meredith L. Fowlie, 2009. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 72-112, August.
    9. Michael Grubb & Karsten Neuhoff, 2006. "Allocation and competitiveness in the EU emissions trading scheme: policy overview," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 7-30, January.
    10. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894.
      • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, March.
    11. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    12. 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.
    13. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
    14. Christoph Böhringer & Andreas Lange, 2005. "Economic Implications of Alternative Allocation Schemes for Emission Allowances," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 563-581, September.
    15. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    16. Fischer, Carolyn, 2003. "Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition," Discussion Papers dp-02-60, Resources For the Future.
    17. James Bushnell & Carla Peterman & Catherine Wolfram, 2008. "Local Solutions to Global Problems: Climate Change Policies and Regulatory Jurisdiction," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 175-193, Summer.
    18. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    19. Jensen, Jesper & Rasmussen, Tobias N., 2000. "Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 111-136, September.
    20. 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.
    21. Burtraw, Dallas & Palmer, Karen L. & Kahn, Danny, 2005. "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program," Discussion Papers 10650, Resources for the Future.
    22. Chen, Yihsu, 2009. "Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover," Energy Economics, Elsevier, vol. 31(5), pages 667-675, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Meunier, Guy & Ponssard, Jean-Pierre, 2014. "Capacity decisions with demand fluctuations and carbon leakage," Resource and Energy Economics, Elsevier, vol. 36(2), pages 436-454.
    2. Ibanez, Marcela & Blackman, Allen, 2015. "Environmental and Economic Impacts of Growing Certified Organic Coffee in Colombia," Discussion Papers dp-15-02, Resources For the Future.
    3. James B. Bushnell & Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2017. "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 57-90, May.
    4. Justin Caron, Sebastian Rausch, and Niven Winchester, 2015. "Leakage from sub-national climate policy: The case of Californias capandtrade program," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    5. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
    6. Harrison Fell & Peter Maniloff, 2015. "Beneficial Leakage: The Effect of the Regional Greenhouse Gas Initiative on Aggregate Emissions," Working Papers 2015-06, Colorado School of Mines, Division of Economics and Business.
    7. Višković, Verena & Chen, Yihsu & Siddiqui, Afzal S. & Tanaka, Makoto, 2019. "Regional carbon policies in an interconnected power system: How expanded coverage could exacerbate emission leakage," Energy Policy, Elsevier, vol. 134(C).
    8. Brittany Tarufelli & Ben Gilbert, 2019. "Leakage in Regional Climate Policy? Implications of Electricity Market Design," Working Papers 2019-07, Colorado School of Mines, Division of Economics and Business.
    9. Sarah Dobson & Jennifer Winter, 2018. "Assessing Policy Support for Emissions-Intensive and Trade-Exposed Industries," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 11(28), October.
    10. Geoffrey Barrows & Hélène Ollivier, 2020. "Foreign Demand, Developing Country Exports, and CO2 Emissions: Firm-Level Evidence from India," PSE Working Papers halshs-01945848, HAL.
    11. Palmer, Karen & Burtraw, Dallas & Paul, Anthony & Yin, Hang, 2017. "Using Production Incentives to Avoid Emissions Leakage," Energy Economics, Elsevier, vol. 68(S1), pages 45-56.
    12. Feijoo, Felipe & Das, Tapas K., 2014. "Design of Pareto optimal CO2 cap-and-trade policies for deregulated electricity networks," Applied Energy, Elsevier, vol. 119(C), pages 371-383.
    13. Geoffrey Barrows & Hélène Ollivier, 2018. "Foreign Demand and Greenhouse Gas Emissions: Empirical Evidence with Implications for Leakage," Working Papers halshs-01945848, HAL.
    14. Meunier, Guy & Montero, Juan-Pablo & Ponssard, Jean-Pierre, 2017. "Using output-based allocations to manage volatility and leakage in pollution markets," Energy Economics, Elsevier, vol. 68(S1), pages 57-65.
    15. Hong, Zhaofu & Chu, Chengbin & Zhang, Linda L. & Yu, Yugang, 2017. "Optimizing an emission trading scheme for local governments: A Stackelberg game model and hybrid algorithm," International Journal of Production Economics, Elsevier, vol. 193(C), pages 172-182.
    16. repec:gam:jsusta:v:8:y:2015:i:1:p:3:d:61052 is not listed on IDEAS
    17. Fell, Harrison & Maniloff, Peter, 2018. "Leakage in regional environmental policy: The case of the regional greenhouse gas initiative," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 1-23.
    18. Višković, Verena & Chen, Yihsu & Siddiqui, Afzal S., 2017. "Implications of the EU Emissions Trading System for the South-East Europe Regional Electricity Market," Energy Economics, Elsevier, vol. 65(C), pages 251-261.
    19. Wang, Ge & Zhang, Qi & Li, Yan & Mclellan, Benjamin C. & Pan, Xunzhang, 2019. "Corrective regulations on renewable energy certificates trading: Pursuing an equity-efficiency trade-off," Energy Economics, Elsevier, vol. 80(C), pages 970-982.
    20. Steven M. Smith, 2019. "The Relative Economic Merits of Alternative Water Rights," Working Papers 2019-08, Colorado School of Mines, Division of Economics and Business.
    21. Bielen, David A., 2018. "Do differentiated performance standards help coal? CO2 policy in the U.S. electricity sector," Resource and Energy Economics, Elsevier, vol. 53(C), pages 79-100.
    22. Bushnell, James & Chen, Yihsu & Zaragoza-Watkins, Matthew, 2014. "Downstream regulation of CO2 emissions in California's electricity sector," Energy Policy, Elsevier, vol. 64(C), pages 313-323.
    23. Chan, Nathan W. & Morrow, John W., 2019. "Unintended consequences of cap-and-trade? Evidence from the Regional Greenhouse Gas Initiative," Energy Economics, Elsevier, vol. 80(C), pages 411-422.

    More about this item

    Keywords

    Allowance trading; Leakage; Carbon regulation; Electricity markets;

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:resene:v:34:y:2012:i:4:p:647-668. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Haili He). General contact details of provider: http://www.elsevier.com/locate/inca/505569 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.