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

  • Bushnell, James
  • Chen, Yihsu

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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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p11804-2010-07-02.pdf
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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
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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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.
  2. 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.
  3. 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 0642, Faculty of Economics, University of Cambridge.
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