- Working Paper
Rights / licenseIn Copyright - Non-Commercial Use Permitted
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. Show more
Journal / seriesEconomics Working Paper Series
PublisherETH Zurich, Center of Economic Research (CER-ETH)
SubjectClimate policy; Cap-and-trade; Allowance allocation; Cost-of-service regulation; Electricity generation
Organisational unit02045 - Dep. Geistes-, Sozial- u. Staatswiss. / Dep. of Humanities, Social and Pol.Sc.
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