Cap-and-Trade Climate Policies with Price-Regulated Industries: How Costly are Free Allowances?

摘要

We examine the impacts of alternative cap-and-trade allowance allocation designs in a model of theU.S. economy where price-regulated electric utilities generate 30% of total CO2 emissions. Our empiricalmodel embeds a generator-level description of electricity production—comprising all 16,891 electricitygenerators in the contiguous U.S.—in a multi-region multi-sector general equilibrium framework thatfeatures regulated monopolies and imperfectly competitive wholesale electricity markets. The model recognizesthe considerable heterogeneity among households incorporating all 15,588 households from theConsumer and Expenditure Survey as individual agents in the model. Depending on the stringency of thepolicy, we find that distributing emission permits freely to regulated utilities increases welfare cost by 40-80% relative to an auction if electricity rates do not reflect the opportunity costs of permits. Despite animplicit subsidy to electricity prices, efficiency costs are disproportionately borne by households in thelowest income deciles.