Aggregate impacts of cap-and-trade programs with heterogeneous firms

Evangelina Dardati and Meryem Saygili

Energy Economics, 2020, vol. 92, issue C

Abstract: We study the long-run effects on output, aggregate TFP, and welfare of alternative permit allocation schemes in a cap-and-trade program. We use a firm dynamics model with heterogeneous firms and add an emission market with a cap-and-trade regulation. We calibrate the model with establishment and emission data in the US and study three permit allocation methods: auctions, output-based-allocation, and grandfathering. A 40% reduction in emissions is associated with a welfare cost that is highest for auctioning (1.20%), followed by grandfathering (0.78%) and, finally, output-based allocation (0.70%). We also consider an endogenous abatement technology, which implies smaller but still significant welfare costs.

Keywords: Cap-and-trade programs; Permit allocation; Firm heterogeneity; Welfare; Aggregate productivity (search for similar items in EconPapers)
JEL-codes: H23 O44 O47 Q52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:92:y:2020:i:c:s0140988320302644

DOI: 10.1016/j.eneco.2020.104924

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