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Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances?

Bruno Lanz and Sebastian Rausch

Year: 2016
Volume: Volume 37
Number: Number 1
DOI: 10.5547/01956574.37.1.blan
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Abstract:
We study whether to auction or to freely distribute emissions allowances when some firms participating in emissions trading are subject to price regulation. We show that free allowances allocated to price-regulated firms effectively act as a subsidy to output, distort consumer choices, and generally induce higher output and emissions by price-regulated firms. This provides a cost-effectiveness argument for an auction-based allocation of allowances (or equivalently an emissions tax). For real-world economies such as the Unites States, in which about 20 percent of total carbon dioxide emissions are generated by price-regulated electricity producers, our quantitative analysis suggests that free allowances increase economy-wide welfare costs of the policy by 40-80 percent relative to an auction. Given large disparities in regional welfare impacts, we show that the inefficiencies are mainly driven by the emissions intensity of electricity producers in regions with a high degree of price regulation.



Asymmetric Information on the Market for Energy Efficiency: Insights from the Credence Goods Literature

Bruno Lanz and Evert Reins

Year: 2021
Volume: Volume 42
Number: Number 4
DOI: 10.5547/01956574.42.4.blan
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Abstract:
Asymmetric information is an important barrier to the adoption of energy efficient technologies. In this paper, we study supply-side implications of the associated incentive structure. We build on existing evidence that, in some settings, energy efficiency owns a credence component, whereby the supply side of the market has more information about what technology is best for consumers. The literature on credence goods markets suggests that an information advantage by expert-sellers leads to market inefficiencies, including low trade volume. We start by developing a simple framework to study supply-side incentives related to the provision of energy efficient technologies. We then document inefficiencies and potential remedies by discussing linkages between an empirical literature on credence goods and that on the market for energy efficiency. Doing so, we identify implications for the design of policies promoting the adoption of energy-efficient technologies.





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