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Climate Economics Seminar: Cap-and-Trade Allowance Allocation Issues

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Date(s): September 23, 2008 (1-2:30 pm)

Location: Room 1117A, EPA East

Presenter: Dallas Burtraw (Resources for the Future)

Description: Policies to cap emissions of carbon dioxide (CO2) in the U.S. economy could pose significant costs on the electricity sector, which contributes roughly 40 percent of total CO2 emissions in the U.S. The electricity sector is especially important because it is where the lion’s share of emission reductions is expected to occur in the early decades of a program. These costs fall unevenly on firms and households. Using a detailed simulation model we evaluate alternative ways that emission allowances can be allocated. Most previous programs have allocated the major portion of allowances for free to incumbent emitters. In the electricity sector this approach would lead to changes in electricity price that vary by region primarily based on whether prices are market-based or determined by cost-of-service regulation. Moreover, the value of the allocation far exceeds the change in market value for the affected firms. Allocation to customers, which could be achieved by allocation to local distribution companies (retail utilities) would recover symmetry in the effect of free allocation and lead to significantly lower overall electricity prices. Unfortunately, this form of compensation provides an implicit subsidy to electricity consumption, which will increase the overall cost of climate policy. The presenter demonstrates the impacts at the household level across regions and income groups under these approaches, and compare these with several other approaches to allocation with the goal of cost-effective compensation for parties most severely affected by climate policy.

This presentation draws on three papers:

  1. Burtraw, D. and Palmer, K. 2008. “Compensation Rules for Climate Policy in the Electricity Sector,” 2008. Journal of Policy Analysis and Management, 27 (4):819-847.
  2. Paul, A., Burtraw D. and Palmer K. 2008. “Free Allocation to Electricity Consumers Under a US CO2 Emissions Cap," Exit EPA Disclaimer RFF Discussion Paper 08-25 (July).
  3. Burtraw, D., Sweeney R. and Walls M. 2008. “The Incidence of U.S. Climate Policy: Where You Stand Depends on Where You Sit,” RFF Discussion Paper 08-28 (August).

Presentation Documents

Presentation Slides (PDF) (PDF, 1,162 kb, About PDF)

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