Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171621
Authors: 
Lanz, Bruno
Rausch, Sebastian
Year of Publication: 
2013
Series/Report no.: 
Economics Working Paper Series 13/178
Abstract: 
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.
Subjects: 
Climate policy
Cap-and-trade
Allowance allocation
Cost-of-service regulation
Electricity Generation
JEL: 
C61
C68
D58
Q43
Q54
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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