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GTAP Resource #3866

"Cap-and-Trade Climate Policies with Price-Regulated Industries: How Costly are Free Allowances?"
by Lanz, Bruno and Sebastian Rausch

In cap-and-trade policies, free allowance allocation can compensate compliance costs by generating `windfall profits'. For price-regulated firms, these profits are not allowed, and the value of allowances has to be passed forward to the consumers. In this paper, we quantify the efficiency and distributional consequences of alternative transfer mechanisms. We employ a model of the U.S. economy where the electricity sector features a large number of regional monopolies responsible for around 30% of economy-wide emissions. We find that freely allocating allowances and transferring the value of permits to consumers through electricity rates would more than triple general equilibrium welfare costs as compared to a lump-sum refund. A subsidy would reduce the dispersion of electricity price changes across operators, but it would increase differences in the regional welfare impacts.

Resource Details (Export Citation) GTAP Keywords
Category: 2012 Conference Paper
Status: Published
By/In: Presented at the 15th Annual Conference on Global Economic Analysis, Geneva, Switzerland
Date: 2012
Created: Rausch, S. (4/29/2012)
Updated: Rausch, S. (6/21/2012)
Visits: 2,460
- Climate change policy

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