Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap

33 Pages Posted: 27 Feb 2009

See all articles by Anthony C. Paul

Anthony C. Paul

Resources for the Future

Dallas Burtraw

Resources for the Future

Karen L. Palmer

Resources for the Future

Date Written: July 16, 2008

Abstract

Policies to cap emissions of carbon dioxide (CO2) in the U.S. economy could pose significant costs on the electricity sector, which contributes roughly 40 percent of total CO2 emissions in the U.S. Using a detailed simulation model of the electricity sector, we evaluate alternative ways that emission allowances can be allocated. Most previous emissions trading programs have allocated the major portion of allowances for free to incumbent firms. In the electricity sector this approach would lead to changes in electricity price that vary by region primarily based primarily on whether prices are market-based or determined by cost-of-service regulation. Allocation to customers, which could be achieved by allocation to local distribution companies (retail utilities) would recover symmetry in the effect of free allocation and lead to significantly lower overall electricity prices. However, this form of compensation comes with an efficiency cost that will increase the overall cost of climate policy.

Keywords: emissions trading, allowance allocations, electricity, air pollution, auction, grandfathering, cost-effectiveness, greenhouse gases, climate change, global warming, carbon dioxide, asset value, compensation

JEL Classification: Q2, Q25, Q4, L94

Suggested Citation

Paul, Anthony C. and Burtraw, Dallas and Palmer, Karen, Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap (July 16, 2008). RFF Discussion Paper No. 08-25, Available at SSRN: https://ssrn.com/abstract=1350033 or http://dx.doi.org/10.2139/ssrn.1350033

Anthony C. Paul (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Dallas Burtraw

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5087 (Phone)

Karen Palmer

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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