Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap
33 Pages Posted: 27 Feb 2009
Date Written: July 16, 2008
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
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