Cap-and-Trade Climate Policy, Free Allowances, and Price-Regulated Firms

Arbeitspapier

Firms subject to cost-of-service regulation cannot withhold windfall profits associated with free emissions allowances. This paper examines the efficiency and distributional impacts of two approaches to transfer free allowances to consumers: output subsidies and lump-sum payments. We employ an empirically calibrated model of the U.S. economy that features regulated monopolies in the electricity sector and many heterogeneous households. Under a carbon dioxide cap-and-trade policy, we find that using free allowances to subsidize regulated electricity prices increases aggregate welfare costs by 40-80 percent relative to lump-sum transfers. These inefficiencies are disproportionately borne by households in the tails of the income distribution.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Working Paper Series ; No. 13/178

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Computable General Equilibrium Models ; Computable and Other Applied General Equilibrium Models ; Energy and the Macroeconomy ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: Climate policy ; Cap-and-trade ; Allowance allocation ; Cost-of-service regulation ; Electricity Generation ; Emissionshandel ; Strompreis ; Preisregulierung ; Elektrizitätswirtschaft ; Marktlagengewinn ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lanz, Bruno ; Rausch, Sebastian
• Event: Veröffentlichung
• (who): ETH Zurich, CER-ETH - Center of Economic Research
• (where): Zurich
• (when): 2013

Further information

• DOI: doi:10.3929/ethz-a-009754278
• Handle: http://hdl.handle.net/10419/171621
• Last update: 10.03.2025, 11:44 AM CET