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Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California

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  • Palmer, Karen

    (Resources for the Future)

  • Burtraw, Dallas

    (Resources for the Future)

  • Paul, Anthony

    (Resources for the Future)

Abstract

The regulation of greenhouse gas emissions from the electricity sector within a cap-and-trade system poses significant policy questions about how to allocate tradable emission allowances. Allocation conveys tremendous value and can have efficiency consequences. This research uses simulation modeling for the electricity sector to examine different approaches to allocation under a cap-and-trade program in California. The decision affects prices and other aspects of the electricity sector, as well as implications for the overall cost of climate policy. An important issue is the opportunity for emission reductions in California to be offset by emission increases in neighboring regions that supply electricity to the state. The amount of emission leakage (i.e. an increase in CO2 emissions outside of California as a result of the program) varies with the regulatory design of the program.

Suggested Citation

  • Palmer, Karen & Burtraw, Dallas & Paul, Anthony, 2009. "Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California," Discussion Papers dp-09-41, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-09-41
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-09-41.pdf
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    References listed on IDEAS

    as
    1. M. Ali Khan, 2007. "Perfect Competition," PIDE-Working Papers 2007:15, Pakistan Institute of Development Economics.
    2. Pizer, William A. & Burtraw, Dallas & Harrington, Winston & Newell, Richard G. & Sanchirico, James N., 2005. "Modeling Economywide versus Sectoral Climate Policies Using Combined Aggregate-Sectoral Models," Discussion Papers 10502, Resources for the Future.
    3. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June.
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    5. Paul, Anthony & Burtraw, Dallas & Palmer, Karen, 2008. "Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap," Discussion Papers dp-08-25, Resources For the Future.
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    7. 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.
    8. 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.
    9. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39, pages 137-137.
    10. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers Archive 31547, Iowa State University, Department of Economics.
    11. 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.
    12. Palmer, Karen L. & Burtraw, Dallas, 2005. "Cost-Effectiveness of Renewable Electricity Policies," Discussion Papers 10845, Resources for the Future.
    13. Fowlie, Meredith, 2007. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0hw645zk, Department of Agricultural & Resource Economics, UC Berkeley.
    14. William Pizer & Dallas Burtraw & Winston Harrington & Richard Newell & James Sanchirico, 2006. "Modeling Economy-wide vs Sectoral Climate Policies Using Combined Aggregate-Sectoral Models," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 135-168.
    15. 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.
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    18. Burtraw, Dallas & Palmer, Karen L. & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," Discussion Papers 10536, Resources for the Future.
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    Citations

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    Cited by:

    1. Hobbs, Benjamin F. & Bushnell, James & Wolak, Frank A., 2010. "Upstream vs. downstream CO2 trading: A comparison for the electricity context," Energy Policy, Elsevier, vol. 38(7), pages 3632-3643, July.
    2. 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.
    3. Paul Kleindorfer & Lide Li, 2011. "Portfolio risk management and carbon emissions valuation in electric power," Journal of Regulatory Economics, Springer, vol. 40(3), pages 219-236, December.
    4. Sadayuki, Taisuke & Arimura, Toshi H., 2021. "Do regional emission trading schemes lead to carbon leakage within firms? Evidence from Japan," Energy Economics, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    cap-and-trade; electricity generation; electricity sector; emissions; regulation; governance; allocation; California;
    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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