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Simple Rules for Targeting CO2 Allowance Allocations to Compensate Firms

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  • Palmer, Karen

    (Resources for the Future)

  • Butraw, Dallas

    (Resources for the Future)

  • Kahn, Danny

    (Resources for the Future)

Abstract

Policies to cap emissions of carbon dioxide (CO2), such as the recently announced agreement among seven northeastern states, are expected to have important effects on the electricity industry and on the market value of firms that own electricity generation assets. The economics literature finds large efficiency advantages for initial distribution of tradable emissions allowances through an auction so as to direct revenues to tax relief or other public investments. However, an auction raises the costs for the regulated firms. This paper identifies rules for an initial distribution that satisfy a compensation goal for firms that is achieved through free distribution of a portion of the allowances, while maximizing the value of allowances that can be directed to public purposes. The paper employs a detailed simulation model to calculate numerical results for the market value of generation assets under the CO2 cap-and-trade program in the northeastern United States.

Suggested Citation

  • Palmer, Karen & Butraw, Dallas & Kahn, Danny, 2006. "Simple Rules for Targeting CO2 Allowance Allocations to Compensate Firms," RFF Working Paper Series dp-06-28, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-06-28
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    References listed on IDEAS

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    1. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," RFF Working Paper Series dp-06-49, Resources for the Future.
    2. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    3. Ian W.H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 2002. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 25, pages 471-503, Edward Elgar Publishing.
    4. Fischer, Carolyn & Fox, Alan, 2004. "Output-Based Allocations of Emissions Permits: Efficiency and Distributional Effects in a General Equilibrium Setting with Taxes and Trade," RFF Working Paper Series dp-04-37, Resources for the Future.
    5. Lawrence H. Goulder & Ian W.H. Parry & Roberton C. Williams III & Dallas Burtraw, 2002. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 27, pages 523-554, Edward Elgar Publishing.
    6. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    7. Burtraw, Dallas & Kahn, Danny & Palmer, Karen, 2006. "CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors," The Electricity Journal, Elsevier, vol. 19(2), pages 79-90, March.
    8. Carolyn Fischer, 2003. "Combining rate-based and cap-and-trade emissions policies," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages 89-103, December.
    9. Ian W.H. Parry, 2005. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 849-869, Winter.
    10. Burtraw, Dallas & Palmer, Karen L. & Kahn, Danny, 2005. "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program," Discussion Papers 10650, Resources for the Future.
    11. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
    12. Wilson, Nathan E. & Palmer, Karen L. & Burtraw, Dallas, 2005. "The Impact of Long-Term Generation Contracts on Valuation of Electricity Generating Assets under the Regional Greenhouse Gas Initiative," Discussion Papers 10556, Resources for the Future.
    13. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," RFF Working Paper Series dp-01-30-, Resources for the Future.
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    Citations

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    Cited by:

    1. Stephen Lecourt & Clément Pallière & Oliver Sartor, 2013. "The impact of emissions-performance benchmarking on free allocations in EU ETS Phase 3," RSCAS Working Papers 2013/17, European University Institute.
    2. Gillenwater, Michael & Breidenich, Clare, 2009. "Internalizing carbon costs in electricity markets: Using certificates in a load-based emissions trading scheme," Energy Policy, Elsevier, vol. 37(1), pages 290-299, January.
    3. Stephen Lecourt & Clement Palliere & Oliver Sartor, 2013. "Free allocations in EU ETS Phase 3: The impact of emissions-performance benchmarking for carbonintensive industry," Working Papers 1302, Chaire Economie du climat.
    4. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
    5. Sato, S. & Grubb, M. & Cust, J. & Chan, K. & Korppoo, A. & Ceppi, P., 2007. "Differentiation and dynamics of competitiveness impacts from the EU ETS," Cambridge Working Papers in Economics 0712, Faculty of Economics, University of Cambridge.
    6. Oren Ahoobim & Nick Burger & Charles Kolstad & Shaun McRae & Corbett Grainger, 2008. "Beyond the Market Advisory Committee: Proceedings from a Workshop Held at Stanford University," Discussion Papers 07-045, Stanford Institute for Economic Policy Research.
    7. Jay S. Coggins & Andrew L. Goodkind & Jason Nguyen & Zhiyu Wang, 2019. "Price Effects, Inefficient Environmental Policy, and Windfall Profits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(3), pages 637-656, March.
    8. Misato Sato & Karsten Neuhoff & Verena Graichen & Katja Schumacher & Felix Matthes, 2013. "Sectors under scrutiny � Evaluation of indicators to assess the risk of carbon leakage in the UK and Germany," GRI Working Papers 113, Grantham Research Institute on Climate Change and the Environment.
    9. Mei, Tianhua & Liu, Jie & Guo, Jianming & Siano, Pierluigi & Jin, Xuanxuan, 2022. "Allocation of emission allowances considering strategic voting," Energy Economics, Elsevier, vol. 114(C).
    10. Goulder, Lawrence H. & Long, Xianling & Lu, Jieyi & Morgenstern, Richard D., 2022. "China's unconventional nationwide CO2 emissions trading system: Cost-effectiveness and distributional impacts," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    11. Jinye Zhao & Benjamin F. Hobbs & Jong-Shi Pang, 2010. "Long-Run Equilibrium Modeling of Emissions Allowance Allocation Systems in Electric Power Markets," Operations Research, INFORMS, vol. 58(3), pages 529-548, June.
    12. Huiqin Jiang & Xinxiao Shao & Xiao Zhang & Jianqiang Bao, 2017. "A Study of the Allocation of Carbon Emission Permits among the Provinces of China Based on Fairness and Efficiency," Sustainability, MDPI, vol. 9(11), pages 1-17, November.
    13. Višković, Verena & Chen, Yihsu & Siddiqui, Afzal S., 2017. "Implications of the EU Emissions Trading System for the South-East Europe Regional Electricity Market," Energy Economics, Elsevier, vol. 65(C), pages 251-261.

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    More about this item

    Keywords

    emissions trading; allowance allocations; electricity; air pollution; auction; grandfathering; output-based allocation; cost-effectiveness; greenhouse gases; climate change; global warming; carbon dioxide; asset value;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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