Facebook LinkedIn Twitter
Shop

IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

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

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.

Download Executive Summary Purchase ( $25 )

Energy Specializations: Energy Investment and Finance – Public and Private Risks, Risk Management; Electricity – Other; Energy and the Economy – Energy as a Productive Input; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Renewables – Policy and Regulation; Renewables – R&D and Emerging Technologies; Petroleum – Policy and Regulation

JEL Codes:
D81 - Criteria for Decision-Making under Risk and Uncertainty
Q49 - Energy: Other
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
O32 - Management of Technological Innovation and R&D
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Tradable Pollution Permits, Climate policy, Auctioning, Free Allocation, Price Regulation, Electricity Generation

DOI: 10.5547/01956574.37.1.blan

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.


Published in Volume 37, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.