Climate Policy’s Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap and Trade
Resources for the Future DP 10-12-REV
38 Pages Posted: 4 Apr 2010 Last revised: 1 Oct 2010
Date Written: September 29, 2010
Abstract
Uncertainty is a fundamental characteristic of climate change. This paper focuses on uncertainty in the implementation of climate policy, especially as it affects the level and distribution of the burden on households that results from the allocation of emissions allowances. We examine the Waxman–Markey bill (H.R. 2454), introduced in the U.S. House of Representatives in 2009, with bookend scenarios labeled optimistic and pessimistic. The scenarios illustrate varied outcomes associated with allocations to electricity local distribution companies, investments in energy efficiency, and technology development. We introduce a third scenario for comparison, which allocates a substantial portion of allowance value directly to households as lump-sum payments. We find the average net household burden in 2016 in the optimistic scenario to be $133 with a CO2 allowance price of $13.19. In the pessimistic scenario, the net household burden rises to $418, with an allowance price of $23.41. While the burden varies by income group, the relative impacts stay roughly the same in the optimistic and pessimistic cases, thus the uncertainty in average burdens does not carry over to uncertainty in the distribution of those burdens. Both scenarios impose the greatest burden as a percentage of income on middle-income households. Allocation of allowance value directly back to households as a lump-sum payment imposes an average net household burden of $206 with much less uncertainty in outcome; the distributional impacts are highly progressive.
Keywords: cap and trade, allocation, distributional effects, cost burden, equity, regulation, local distribution companies
JEL Classification: H22, H23, Q52, Q54
Suggested Citation: Suggested Citation
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