Working Paper: Allocation of CO2 Emission Allowances to Achieve Compensation Goals

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On September 23, 2008 Dallas Burtraw presented a seminar in the NCEE Climate Economics Series. The presentation argued that 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 author 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 drew on three papers:
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.
Paul, A., Burtraw D. and Palmer K. 2008. “Free Allocation to Electricity Consumers Under a US CO₂ Emissions Cap,” RFF Discussion Paper 08-25 (July). (http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=20484)
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).

Keywords
Subject:	4. Economic Incentives and Other Innovative Approaches 4. Economic Incentives and Other Innovative Approaches - Trading and Marketable Permits	Media:	Air

Paper Information
Author(s):	Dallas Burtraw	Institution Issuing Paper:	Resources for the Future
Status:	Final version working paper
		Primary Content:	Empirical
Paper Date:	09/23/2008
		Pages:	44
Electronic Copy Paper #: File Description: Adobe Acrobat, 1.2MB File Attachment:

Working Paper: Allocation of CO2 Emission Allowances to Achieve Compensation Goals

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