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Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program

Author

Listed:
  • Michael Dworsky

    () (Brookings Institution)

  • Lawrence Goulder

    () (Stanford Environmental and Energy Policy Analysis Center, Stanford University)

  • Marc Hafstead

    () (Stanford University)

Abstract

This paper employs a dynamic general equilibrium model of the U.S. economy to address the federal cap-and-trap issue. The model’s unique treatment of capital dynamics permits close attention to the impacts of alternative policies on industry profits. We find that freely allocating a relatively small fraction of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Under a wide range of cap-and-trade designs, freely allocating less than 15 percent of the total allowances prevents profit losses to these most vulnerable industries. Allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits. These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower. On the other hand, when the auction proceeds are returned to the economy in lump-sum fashion, the potential costadvantages of auctioning are not realized.

Suggested Citation

  • Michael Dworsky & Lawrence Goulder & Marc Hafstead, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program," Discussion Papers 08-048, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:08-048
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    File URL: http://www-siepr.stanford.edu/repec/sip/08-048.pdf
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    References listed on IDEAS

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    4. Lawrence H. Summers, 1980. "Inflation, Taxation, and Corporate Investment: A q-Theory Approach," NBER Working Papers 0604, National Bureau of Economic Research, Inc.
    5. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
    6. Carlo Carraro & Gilbert E. Metcalf, 2001. "Behavioral and Distributional Effects of Environmental Policy," NBER Books, National Bureau of Economic Research, Inc, number carr01-1, June.
    7. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    8. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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    Cited by:

    1. James B. Bushnell & Howard Chong & Erin T. Mansur, 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," NBER Working Papers 15572, National Bureau of Economic Research, Inc.

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