Simple rules for targeting CO2 allowance allocations to compensate firms

Abstract Policies to cap emissions of carbon dioxide (CO2), such as the recently announced agreement among the northeastern states of the USA, are expected to have important effects on the electricity industry and on the market value of firms that own electricity generation assets. A study of the economics literature reveals potentially large efficiency advantages for initial distribution of tradable emissions allowances through an auction and direction of allowance value to public purposes. However, an auction raises the costs for the regulated firms. This article identifies rules for free distribution of a portion of the allowances that satisfy a compensation goal for firms while maximizing the value of allowances that can be directed to public purposes. The article employs a detailed simulation model to calculate numerical results for the market value of generation assets under the CO2 cap-and-trade programme in the northeastern USA.

[1]  Dallas Burtraw,et al.  Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program , 2005 .

[2]  L. Goulder,et al.  Neutralizing the Adverse Industry Impacts of CO 2 Abatement Policies : What Does It Cost ? , 2000 .

[3]  W. Lise,et al.  CO 2 price dynamics: The implications of EU emissions trading for the price of electricity , 2005 .

[4]  Bill Shaw,et al.  THE PUBLIC USE OF PRIVATE INTEREST , 1980 .

[5]  A. Polinsky.  Probabilistic Compensation Criteria , 1972 .

[6]  I. Parry.  Fiscal Interactions and the Costs of Controlling Pollution from Electricity , 2004 .

[7]  Ranjit Bharvirkar,et al.  The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances , 2002 .

[8]  Dallas Burtraw,et al.  The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting , 1998 .

[9]  L. Goulder,et al.  When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets , 1996 .

[10]  L. Goulder,et al.  Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses , 1994 .

[11]  T. Sterner,et al.  Output and abatement effects of allocation readjustment in permit trade , 2008 .

[12]  J. M. Buchanan.  The Coase Theorem and the Theory of the State , 1973 .

[13]  Dallas Burtraw,et al.  CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors , 2006 .

[14]  R. Mooij,et al.  Environmental Levies and Distortionary Taxation. , 1994 .

[15]  E. Hopkins,et al.  Running to Keep in the Same Place: Consumer Choice as a Game of Status , 2002 .

[16]  Ian W. H. Parry,et al.  Pollution Taxes and Revenue Recycling , 1995 .