Efficiency and Distributional Consequences of the Allocation of Tradable Emission AllowancesEPA Grant Number: R828628
Title: Efficiency and Distributional Consequences of the Allocation of Tradable Emission Allowances
Investigators: Burtraw, Dallas , Fischer, Carolyn , Pizer, Billy
Current Investigators: Burtraw, Dallas , Carlson, Curtis , Fischer, Carolyn , Palmer, Karen , Pizer, Billy
Institution: Resources for the Future
EPA Project Officer: Lee, Sonja
Project Period: October 1, 2000 through September 30, 2002 (Extended to September 30, 2003)
Project Amount: $251,000
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
As emission trading policies begin to encompass more diverse actors and extend over greater time frames, decision makers are looking beyond "grandfathering" toward new allocation methods, particularly ones that adjust over time. We will analyze three approaches to allocating permits: (1) grandfathering permits based on historic emissions or production; (2) auctioning, with revenues retained by government; and (3) updating allocations based on a recent-year activity, in particular "output-based" allocations and tradable performance standards. We will evaluate these approaches according to three criteria: cost-effectiveness, environmental performance, and distributional impacts.
We will investigate these questions using analytical and pre-existing simulation models. The simulations will involve a detailed electricity sector model coupled to an integrated assessment for environmental assessment. It also will involve two computable general equilibrium models, one of the U.S. and another international model that includes trade. A methodological contribution will be to integrate detailed results of the sector models with welfare measures obtained through general equilibrium analysis.
The results will inform decision-makers and interested parties at the state and federal level. State decision-makers will be interested in understanding the cost and distributional consequences of their decisions, as well as understanding more generally their possible choices with respect to permit allocation. The results of this research will help state decision-makers to engage in efforts at regional coordination in the design and implementation of trading programs. We also anticipate this research providing information about the actual performance of programs that have been implemented. Environmental advocates and industry will benefit from this research by obtaining a more complete understanding of the attributes of various approaches to environmental regulation and how those attributes affect the issues of greatest concern to them. As firms are already considering control strategies for greater NOX and possibly SO2 control this research will help them identify salient considerations important to their abatement decisions in the face of varying uncertainty. In addition, the research offers a contribution to scholarship through analytical and methodological advances. In addition, agency and congressional staff should be interested in the immediate policy-relevant nature of the research. A fuller understanding by all of these parties of the cost-effectiveness, distributional and environmental aspects of these policy instruments should lead to more efficient and more equitable outcomes.