1. Cap-and-trade climate policy, free allowances, and price-regulated firms
- Author
-
Lanz, Bruno and Rausch, Sebastian
- Subjects
Electricity generation ,Strompreis ,Climate policy ,Cap-and-trade ,Allowance allocation ,Cost-of-service regulation ,Q43 ,Q54 ,Marktlagengewinn ,Natural resources, energy and environment ,C61 ,Electricity Generation ,ddc:330 ,C68 ,ddc:333.7 ,D58 ,Emissionshandel ,Preisregulierung ,Elektrizitätswirtschaft ,USA - Abstract
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., Economics Working Paper Series, 13/178
- Published
- 2013