Cap-and-Trade Climate Policy, Free Allowances, and Price-Regulated Firms

Bruno Lanz and Sebastian Rausch

No 13/178, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Firms subject to cost-of-service regulation cannot withhold windfall profits associated with free emissions allowances. This paper examines the efficiency and distributional impacts of two approaches to transfer free allowances to consumers: output subsidies and lump-sum payments. We employ an empirically calibrated model of the U.S. economy that features regulated monopolies in the electricity sector and many heterogeneous households. Under a carbon dioxide cap-and-trade policy, we find that using free allowances to subsidize regulated electricity prices increases aggregate welfare costs by 40-80 percent relative to lump-sum transfers. These inefficiencies are disproportionately borne by households in the tails of the income distribution.

Keywords: Climate policy; Cap-and-trade; Allowance allocation; Cost-of-service regulation; Electricity Generation. (search for similar items in EconPapers)
JEL-codes: C61 C68 D58 Q43 Q54 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013-04
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances? (2015)
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