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

Bruno Lanz and Sebastian Rausch

No 34-2015, CIES Research Paper series from Centre for International Environmental Studies, The Graduate Institute

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)
JEL-codes: C6 D4 D5 Q4 Q5 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-01-26
New Economics Papers: this item is included in nep-cta, nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances? (2016)
Journal Article: Emissions Trading in the Presence of Price-Regulated Polluting Firms: How Costly Are Free Allowances? (2016)
Working Paper: Cap-and-Trade Climate Policy, Free Allowances, and Price-Regulated Firms (2013)
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