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

Bruno Lanz and Sebastian Rausch

The Energy Journal, 2016, vol. 37, issue 1, 195-232

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.

Keywords: Tradable Pollution Permits; Climate policy; Auctioning; Free; Allocation; Price Regulation; Electricity Generation (search for similar items in EconPapers)
Date: 2016
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Journal Article: Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances? (2016)
Working Paper: Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:37:y:2016:i:1:p:195-232

DOI: 10.5547/01956574.37.1.blan

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