Climate Policy’s Uncertain Outcomes
for Households:
The Role of Complex Allocation
Schemes in Cap-and-Trade
1. Project is ambitious, important, and complicated.
2. The unit of analysis is neither “ΔCS” nor “welfare”
3. Distributional effects not uncertain.
1. Project is ambitious, important, and complicated.
Data:
• Consumer Exp. Survey
• 2004-06
• 40k households
RFF Haiku model of electricity sector
H.R. 2454 – three interpretations
Assumptions:
• Allowances spent internationally
lost.
• Govt incurs higher energy costs
(14% of allowances) and
increases average personal
income tax.
• …..
Effect on
“Consumer Surplus”
by quintile
Scenarios:
1. “Pessimistic” (i.e. “bad policy”)
• Allowance revenues used to reduce variable electricity rates
for all customers.
2. “Optimistic” (i.e. “better policy”)
• Allowance revenues used to reduce fixed electricity costs for
non-residential.
[Note irony: law works better if it doesn’t work as intended.]
3. “Cap and Dividend”
• Allowances auctioned, 75% returned lump sum.
Aside: Why not reduce fixed electricity costs for residential?
•
•
•
Billing practices make this difficult.
Fixed costs do not appear on a separate line.
Residential customers unlikely to respond to changes in rates.
Aside: One reason this is so complex is that H.R. 2454
uses allowance revenue to finance energy efficiency.
The “belt and suspenders” approach.
Assume:
- Energy efficiency would not respond to allowance price signal alone.
- Investments have net benefits in optimistic scenario.
- Have no benefits in pessimistic scenario.
Maybe the belt makes the suspenders irrelevant.
2. The unit of analysis is neither “ΔCS” nor “welfare”
• Includes changes in income taxes
• Excludes producer surplus and some other goods
$
D
S
ΔCS
ΔPS
electricity
$
D
ΔCS
S
ΔPS
other goods/services
3. Distributional effects not uncertain.
"Optimistic" Case
3. Distributional effects
not uncertain.
350
300
250
200
150
100
50
0
1
-50
2
3
4
5
-100
-150
Quintiles
"Pessimistic" Case
"Cap & Dividend" Case
1200
900
1000
800
700
800
600
600
500
400
400
300
200
200
0
-200
100
1
2
3
4
5
0
-100
-400
1
2
3
-200
Quintiles
Quintiles
4
5
Summary:
Distributional effects important and complicated
1. Between the U.S. and other countries
2. Across regions of the U.S.
3. Across industries.
4. Across income quintiles in the U.S.
This paper suggests #4 may be the least uncertain.