Skip to main content
Article thumbnail
Location of Repository

Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap

By Anthony Paul, Dallas Burtraw and Karen Palmer


Policies to cap emissions of carbon dioxide (CO2) in the U.S. economy could pose significant costs on the electricity sector, which contributes roughly 40 percent of total CO2 emissions in the U.S. Using a detailed simulation model of the electricity sector, we evaluate alternative ways that emission allowances can be allocated. Most previous emissions trading programs have allocated the major portion of allowances for free to incumbent firms. In the electricity sector this approach would lead to changes in electricity price that vary by region primarily based primarily on whether prices are market-based or determined by cost-of-service regulation. Allocation to customers, which could be achieved by allocation to local distribution companies (retail utilities) would recover symmetry in the effect of free allocation and lead to signficiantly lower overall electricity prices. However, this form of compensation comes with an efficiency cost that will increase the overall cost of climate policy.emissions trading, allowance allocations, electricity, air pollution, auction, grandfathering, cost-effectiveness, greenhouse gases, climate change, global warming, carbon dioxide, asset value, compensation

OAI identifier:

Suggested articles


  1. (2007). Assessment of U.S. Cap-and-Trade Proposals.
  2. (2007). Cap and Dividend: How to Curb Global Warming while Protecting the Incomes of American Families. Working paper No.
  3. (2007). Climate-Change Policies Can Treat Poor Families Fairly and be Fiscally Responsible. Washington D.C.: Center on Budget and Policy Priorities.
  4. (2007). CO2 Allowance & Electricity Price Interaction. International Energy Information Paper (February). Paris: OECD/IEA. 30 Rosendahl, Knut Einer.
  5. (2006). CO2 allowance allocation in the regional greenhouse gas initiative and the effect on electricity investors.
  6. (2008). Economic and Energy Impacts from Participation in the Regional Greenhouse Gas Initiative: A Case Study of the State of Maryland.
  7. (2007). Energy Information Administration
  8. (2005). Fiscal Interactions and the Costs of Controlling Pollution from Electricity.”
  9. (2002). Implications of Trading Implementation Design for Equity-Efficiency Trade-Offs in Carbon Permit Allocations.” Washington, DC: Charles River Associates.
  10. (2008). Information Administration.
  11. (2001). Neutralizing the Adverse Industry Impacts of CO2 Abatement policies: What Does it Cost?”
  12. (2006). New entrant allocation in the Nordic energy sectors: incentives and options in
  13. (1996). Optimal Environmental Taxation in the Presence of Other Taxes:
  14. (2007). Output and Abetment Effects of Allocation Readjustment in Permit Trade. Climatic Change,
  15. (2004). Output-Based Allocations of Emissions Permits: Efficiency and Distributional Effects in a General Equilibrium Setting with Taxes and Trade. RFF Discussion Paper 04-37. Washington, DC: Resources for the Future.
  16. (2001). Power Plant Emission Reductions Using a Generation Performance Standard.” Draft.
  17. (2007). Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? US Greenhouse Gas Abatement Mapping Initiative, Executive Report,
  18. (1999). The CostEffectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting.”
  19. (2001). The Effect of Allowance Allocation on the Cost of Carbon Emission Trading,” Resources for the Future Discussion Paper 01-30.
  20. (1977). The Public Use of Private Interest.
  21. (2004). The Technical, Economic and Achievable Potential for Energy Efficiency in the U.S. – A Meta-Analysis of Recent Studies”,
  22. (1999). When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor
  23. (2008). Where You Stand Depends on Where You Sit: The Regional Incidence of Climate Policy,” Resources for the Future.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.