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

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."

Source: Wiley

Explore further: New modeling shows Canadian decarbonization technically possible

Related Stories

New study re-writes the rules of carbon analysis

June 30, 2015

A new study published today in Nature Climate Change has found analyses of carbon emissions may be misleading as they failed to include the impacts of policies such as trading schemes, emission caps or quotas.

The true cost of fuelling conflict

June 23, 2015

The United States Department of Defense (DOD) is widely reported to be the single largest consumer of petroleum in the world, spending billions of dollars on fuel every year. While the DOD provides Congress with yearly budget ...

Recommended for you

Early human diet explains our eating habits

August 31, 2015

Much attention is being given to what people ate in the distant past as a guide to what we should eat today. Advocates of the claimed palaeodiet recommend that we should avoid carbohydrates and load our plates with red meat ...

Just how good (or bad) is the fossil record of dinosaurs?

August 28, 2015

Everyone is excited by discoveries of new dinosaurs – or indeed any new fossil species. But a key question for palaeontologists is 'just how good is the fossil record?' Do we know fifty per cent of the species of dinosaurs ...

Fractals patterns in a drummer's music

August 28, 2015

Fractal patterns are profoundly human – at least in music. This is one of the findings of a team headed by researchers from the Max Planck Institute for Dynamics and Self-Organization in Göttingen and Harvard University ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.