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

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  • Burtraw, Dallas

    (Resources for the Future)

  • Palmer, Karen

    (Resources for the Future)

  • Bharvirkar, Ranjit
  • Paul, Anthony

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.

Suggested Citation

  • Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," RFF Working Paper Series dp-01-30-, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-01-30-
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    More about this item

    Keywords

    carbon; emission allowance trading; allowance allocations; electricity; restructuring; air pollution; safety valve; auction; grandfathering; generation performance standard; output-based allocation; cost-effectiveness;
    All these keywords.

    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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