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

  • Blonz, Joshua

    ()

    (Resources for the Future)

  • Burtraw, Dallas

    ()

    (Resources for the Future)

  • Walls, Margaret A.

    ()

    (Resources for the Future)

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.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-10-12.

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Date of creation: 29 Sep 2010
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Handle: RePEc:rff:dpaper:dp-10-12
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  1. Kevin A. Hassett & Aparna Mathur & Gilbert E. Metcalf, 2007. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," NBER Working Papers 13554, National Bureau of Economic Research, Inc.
  2. Corbett A. Grainger & Charles D. Kolstad, 2009. "Who Pays a Price on Carbon?," NBER Working Papers 15239, National Bureau of Economic Research, Inc.
  3. 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.
  4. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
  5. Toshi H. Arimura & Shanjun Li & Richard G. Newell & Karen Palmer, 2011. "Cost-Effectiveness of Electricity Energy Efficiency Programs," NBER Working Papers 17556, National Bureau of Economic Research, Inc.
  6. Parry, Ian, 2003. "Are Emissions Permits Regressive?," Discussion Papers dp-03-21, Resources For the Future.
  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," National Tax Journal, National Tax Association, vol. 62(3), pages 497-518, September.
  8. 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.
  9. Don Fullerton & Garth Heutel, 2010. "The General Equilibrium Incidence of Environmental Mandates," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 64-89, August.
  10. Palmer, Karen & Newell, Richard & Gillingham, Kenneth, 2004. "Retrospective Examination of Demand-side Energy-efficiency Policies," Discussion Papers dp-04-19, Resources For the Future.
  11. Dinan, Terry & Rogers, Diane Lim, 2002. "Distributional Effects of Carbon AllowanceTrading: How Government Decisions Determine Winners and Losers," National Tax Journal, National Tax Association, vol. 55(N. 2), pages 199-221, June.
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