Cap and trade policies limiting CO2 can increase value of some electricity generating firms

December 17, 2008

Washington, D.C. - December 17, 2008 - A new study in the Journal of Policy Analysis and Management explores ways to target the compensation provided by the free allocation of emission allowances under a CO2 cap and trade policy in order to avoid overcompensation of firms that already are benefiting from the program.

In most prior cap and trade programs, emission allowances have been given away for free to pollution emitting firms as a way to compensate them for the costs imposed by the policy. In the case of a CO2 cap and trade program affecting the electricity sector, some firms actually profit from the policy and others lose. Consumers as a group will lose in the sense that they will see increases in electricity prices.

A cap and trade policy that limits emissions of CO2 can increase the value of some electricity generating firms. Free distribution of just 6 percent of the total allowances would be sufficient to compensate shareholders for the loss in market value on an industry-wide basis.

However, granting free allowances to compensate firms for their losses under a cap and trade policy can be costly. It is difficult to compensate losers without also compensating undeserving parties. The researchers find that compensating firms for the last $2.6 billion in losses at the federal level imposes a cost of roughly $25 billion.

"Climate policy promises to be more costly than all prior air pollution policies. The use of a cap and trade approach will help to keep the costs low, but it will impose costs on various sectors of the economy," the authors note. "Information about how to deliver compensation in a cost-effective manner could help to increase the political acceptability of climate policy and help preserve a larger share of allowance value that might be used in ways that lower the costs of compliance with the program and, thereby lower the economic impact of the policy."

Dallas Burtraw, Ph.D., and Karen Palmer, Ph.D., both of Resources for the Future, utilized a detailed simulation model of the electricity sector to quantify the effects of different allocation approaches on asset values for electricity generators.
-end-
This study is published in the Fall 2008 issue of the Journal of Policy Analysis and Management. Media wishing to receive a PDF of this article may contact journalnews@bos.blackwellpublishing.net.

Dallas Burtraw is affiliated with Resources for the Future and can be reached for questions at Burtraw@rff.org.

The Journal of Policy Analysis and Management encompasses issues and practices in policy analysis and public management. Listed among the contributors are economists, public managers, and operations researchers. Featured regularly are book reviews and a department devoted to discussing ideas and issues of importance to practitioners, researchers, and academics.

Wiley-Blackwell was formed in February 2007 as a result of the acquisition of Blackwell Publishing Ltd. by John Wiley & Sons, Inc., and its merger with Wiley's Scientific, Technical, and Medical business. Together, the companies have created a global publishing business with deep strength in every major academic and professional field. Wiley-Blackwell publishes approximately 1,400 scholarly peer-reviewed journals and an extensive collection of books with global appeal. For more information on Wiley-Blackwell, please visit www.wiley-blackwell.com or http://interscience.wiley.com.

Wiley

Related Climate Policy Articles from Brightsurf:

Are climate scientists being too cautious when linking extreme weather to climate change?
Climate science has focused on avoiding false alarms when linking extreme events to climate change.

Natural capital a missing piece in climate policy
Clean air, clean water and a functioning ecosystem are considered priceless.

Natural disasters must be unusual or deadly to prompt local climate policy change
Natural disasters alone are not enough to motivate local communities to engage in climate change mitigation or adaptation, a new study from Oregon State University found.

Climate Insights 2020: Climate opinions unchanged by pandemic, but increasingly entrenched
A new survey provides a snapshot of American opinion on climate change as the nation's public health, economy, and social identity are put to the test.

Study: Integrating satellite and socioeconomic data to improve climate change policy
Bangladesh is on track to lose all of its forestland in the next 35-40 years, leading to a rise in CO2 emissions and subsequent climate change, researchers said.

Growing volume of gun policy research creates basis for policy decisions
While research about many gun policies still lags, a surging number of studies now provides the evidence needed to make sound decisions on policies designed to reduce homicides and injuries while protecting individuals' rights.

Sub-national 'climate clubs' could offer key to combating climate change
'Climate clubs' offering membership for sub-national states, in addition to just countries, could speed up progress towards a globally harmonized climate change policy, which in turn offers a way to achieve stronger climate policies in all countries.

Review of Chinese atmospheric science research over the past 70 years: Climate and climate change
Over the past 70 years since the foundation of the People's Republic of China, Chinese scientists have made great contributions to various fields in the research of atmospheric sciences, which attracted worldwide attention.

Conservatives more likely to support climate policy if they report harm due to extreme weather
People who identify as politically conservative are more like to support climate change mitigation policies if they have report experiencing personal harm from an extreme weather event such as a wildfire, flood or tornado, a new study indicates.

Rethinking scenario logic for climate policy
Current scenarios used to inform climate policy have a weakness in that they typically focus on reaching specific climate goals in 2100 - an approach which may encourage risky pathways that could have long-term negative effects.

Read More: Climate Policy News and Climate Policy Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.