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Climate Policy’s Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap and Trade

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  • Blonz, Joshua

    () (Resources for the Future)

  • Burtraw, Dallas

    () (Resources for the Future)

  • Walls, Margaret A.

    () (Resources for the Future)

Abstract

Uncertainty is a fundamental characteristic of climate change. This paper focuses on uncertainty in the implementation of climate policy, especially as it affects the level and distribution of the burden on households that results from the allocation of emissions allowances. We examine the Waxman–Markey bill (H.R. 2454), introduced in the U.S. House of Representatives in 2009, with bookend scenarios labeled optimistic and pessimistic. The scenarios illustrate varied outcomes associated with allocations to electricity local distribution companies, investments in energy efficiency, and technology development. We introduce a third scenario for comparison, which allocates a substantial portion of allowance value directly to households as lump-sum payments. We find the average net household burden in 2016 in the optimistic scenario to be $133 with a CO2 allowance price of $13.19. In the pessimistic scenario, the net household burden rises to $418, with an allowance price of $23.41. While the burden varies by income group, the relative impacts stay roughly the same in the optimistic and pessimistic cases, thus the uncertainty in average burdens does not carry over to uncertainty in the distribution of those burdens. Both scenarios impose the greatest burden as a percentage of income on middle-income households. Allocation of allowance value directly back to households as a lump-sum payment imposes an average net household burden of $206 with much less uncertainty in outcome; the distributional impacts are highly progressive.

Suggested Citation

  • Blonz, Joshua & Burtraw, Dallas & Walls, Margaret A., 2010. "Climate Policy’s Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap and Trade," Discussion Papers dp-10-12, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-10-12
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    References listed on IDEAS

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    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
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    3. Palmer, Karen & Newell, Richard & Gillingham, Kenneth, 2004. "Retrospective Examination of Demand-side Energy-efficiency Policies," Discussion Papers dp-04-19, Resources For the Future.
    4. Kevin A. Hassett & Aparna Mathur & Gilbert E. Metcalf, 2009. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 155-178.
    5. 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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    7. Parry, Ian W. H., 2004. "Are emissions permits regressive?," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 364-387, March.
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    Cited by:

    1. Epanchin-Niell, Rebecca S. & Wilen, James E., 2010. "Optimal control of spatial-dynamic processes: The case of biological invasions," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61375, Agricultural and Applied Economics Association.
    2. Levinson Arik M, 2010. "Comment on "Climate Policy's Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap-and-Trade"," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-4, November.
    3. William A. Pizer & Steven Sexton, 2017. "Distributional Impacts of Energy Taxes," NBER Working Papers 23318, National Bureau of Economic Research, Inc.
    4. van Ruijven, Bas J. & O’Neill, Brian C. & Chateau, Jean, 2015. "Methods for including income distribution in global CGE models for long-term climate change research," Energy Economics, Elsevier, vol. 51(C), pages 530-543.
    5. Joshua Blonz & Dallas Burtraw & Margaret Walls, 2012. "Social safety nets and US climate policy costs," Climate Policy, Taylor & Francis Journals, vol. 12(4), pages 474-490, July.

    More about this item

    Keywords

    cap and trade; allocation; distributional effects; cost burden; equity; regulation; local distribution companies;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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