The Effect of Allowance Allocation on the Cost of Carbon Emission Trading

Dallas Burtraw, Karen Palmer, Ranjit Bharvirkar and Anthony Paul

RFF Working Paper Series from Resources for the Future

Abstract: We investigate the cost-effectiveness and distributional effects of a revenue-raising auction, grandfathering, and a generation performance standard as alternative approaches for distributing carbon emission allowances in the electricity sector. We solve a detailed national electricity market model and find the auction is roughly one-half the societal cost of the other approaches. This result holds under a variety of assumptions about the future state of economic regulation and competition in the electricity sector. The differences in the cost of the approaches flow from the effect of each approach on electricity price. Grandfathering is the best for producers but it imposes a substantial cost on consumers. The generation performance standard yields the lowest electricity price but highest natural gas price. The auction does better than the generation performance standard at protecting households and at preserving asset values for producers. It also yields revenues that can help meet other efficiency and distributional goals.

Keywords: carbon; emission allowance trading; allowance allocations; electricity; restructuring; air pollution; safety valve; auction; grandfathering; generation performance standard; output-based allocation; cost-effectiveness (search for similar items in EconPapers)
JEL-codes: L94 Q2 Q25 Q4 (search for similar items in EconPapers)
Date: 2001-08-01
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (99)

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Working Paper: The Effect of Allowance Allocation on the Cost of Carbon Emission Trading (2001)
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