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Distributional Impacts of Carbon Pricing Policies in the Electricity Sector

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    The introduction of a price on carbon dioxide will have important effects on the U.S. economy, and especially important effects on the electricity sector, which currently accounts for about 40 percent of carbon dioxide emissions. This paper examines alternative approaches to the distribution of allowance value to the sector, including free allocation to consumers through electricity and natural gas local distribution companies (LDCs). Recent proposals in the U.S. Congress, including H.R. 2454, have suggested this option as a way to address impacts on consumers and potential regional inequities. We compare allocation to electricity LDCs with a system in which allowances are auctioned and revenues returned to households as a per capita dividend. We evaluate the outcomes under alternative assumptions about how LDCs, which are regulated entities, pass through the allowance value to final residential, commercial, and industrial customers. Our results show that the LDC approach raises the price of allowances and imposes greater costs on households than the per capita dividend option. We also evaluate a more complete characterization of H.R. 2454 and show that an incremental reform to that bill would greatly reduce costs and have more balanced impacts across households in different income groups and regions.

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-09-43.pdf
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    Paper provided by Resources For the Future in its series Discussion Papers with number dp-09-43.

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    Date of creation: 11 Dec 2009
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    Handle: RePEc:rff:dpaper:dp-09-43
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    1. 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.
    2. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," Discussion Papers dp-02-15-, Resources For the Future.
    3. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    4. S. Paltsev & J. Reilly & H. Jacoby & A. Gurgel & G. Metcalf & A. Sokolov & J. Holak, 2007. "Assessment of U.S. Cap-and-Trade Proposals," Working Papers 0705, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    5. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
    6. Kevin A. Hasset & Aparna Mathur & Gilbert Metcalf, 2007. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," Discussion Papers Series, Department of Economics, Tufts University 0714, Department of Economics, Tufts University.
    7. Burtraw, Dallas & Sweeney, Richard & Walls, Margaret, 2009. "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction," Discussion Papers dp-09-17-rev, Resources For the Future.
    8. Ahman, Markus & Burtraw, Dallas & Kruger, Joseph & Zetterberg, Lars, 2007. "A Ten-Year Rule to guide the allocation of EU emission allowances," Energy Policy, Elsevier, vol. 35(3), pages 1718-1730, March.
    9. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January.
    10. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    11. Parry, Ian, 2003. "Are Emissions Permits Regressive?," Discussion Papers dp-03-21, Resources For the Future.
    12. Gilbert E. Metcalf & Sergey Paltsev & John Reilly & Henry Jacoby & Jennifer F. Holak, 2008. "Analysis of U.S. Greenhouse Gas Tax Proposals," NBER Working Papers 13980, National Bureau of Economic Research, Inc.
    13. 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.
    14. Charles A. Holt & William Shobe & Dallas Burtraw & Karen Palmer & Jacob K. Goeree, 2007. "Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative," Reports 2007-03, Center for Economic and Policy Studies.
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