Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program
This paper examines the implications of alternative allowance allocation designs under a federal cap-and-trade program to reduce emissions of greenhouse gases. We focus on the impacts on industry profits and overall economic output, employing a dynamic general equilibrium model of the U.S. economy. The model's unique treatment of capital dynamics permits close attention to profit impacts. We find that the effects on profits depend critically on the method of allowance allocation. Freely allocating fewer than 15 percent of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Freely allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits. These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower than when all allowances are freely allocated and no auction revenue is generated. On the other hand, when auction proceeds are returned to the economy in lump-sum fashion (for example, as rebate checks to households), the potential cost-advantages of auctioning are not realized. Our results are robust to cap-and-trade policies that differ according to policy stringency, the availability of offsets, and the extent of opportunities for intertemporal trading of allowances.
|Date of creation:||Aug 2009|
|Date of revision:|
|Publication status:||published as Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program Lawrence H. Goulder, Marc A.C. Hafstead, and Michael Dworsky Journal of Environmental Economics and Management | November 2010 | Vol. 60, No. 3 | pp. 161-181.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
- Kling, Catherine L. & Rubin, Jonathan, 1997.
"Bankable Permits for the Control of Environmental Pollution,"
Staff General Research Papers
1479, Iowa State University, Department of Economics.
- Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
- Parry, Ian, 2003.
"Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits,"
dp-03-46, Resources For the Future.
- Ian W. H. Parry, 2003. "Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 385-399.
- James M. Poterba & Lawrence H. Summers, 1984.
"The Economic Effects of Dividend Taxation,"
343, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fair, Ray C & Taylor, John B, 1983.
"Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models,"
Econometric Society, vol. 51(4), pages 1169-85, July.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
- Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
- Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
- Stavins, Robert, 2007. "A U.S. Cap-and-Trade System to Address Global Climate Change," Working Paper Series rwp07-052, Harvard University, John F. Kennedy School of Government.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15293. 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: ()
If references are entirely missing, you can add them using this form.