Working Paper: NBER ID: w16307
Authors: Meredith Fowlie
Abstract: U.S. adoption of a cap-and-trade program for greenhouse gases could place some domestic producers at a disadvantage relative to international competitors who do not face similar regulation. To address this issue, proposed federal climate change legislation includes a provision that would freely allocate (or rebate) emission allowances to eligible sectors using a continuously updating output-based formula. Eligibility for the rebates would be determined at the industry-level based on emissions or energy intensity and a measure of import penetration. Dynamic updating of permit allocations has the potential to mitigate adverse competitiveness impacts and emissions leakage in eligible industries. It can also undermine the cost-effectiveness of permit market outcomes, as more of the mandated emissions reductions must then be achieved by sources deemed ineligible for rebates. This chapter investigates both the benefits and the costs of output-based updating. It identifies differences between proposed eligibility criteria and those consistent with standard measures of economic efficiency. The analysis underlines the importance of taking both benefits and costs into account when determining the scale and scope of output-based rebating provisions in cap-and-trade programs.
Keywords: No keywords provided
JEL Codes: Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Output-based updating of emissions permits (Q58) | mitigate adverse competitiveness impacts (F69) |
| Output-based updating of emissions permits (Q58) | reduce emissions leakage in eligible industries (Q52) |
| Output-based updating of emissions permits (Q58) | undermine cost-effectiveness of permit market outcomes (D41) |
| Output-based updating of emissions permits (Q58) | reduce welfare compared to auctioning or lump-sum allocations (D69) |
| Net welfare impact of output-based rebates (H23) | contingent on emissions intensity and price elasticity of supply and demand (Q31) |
| Output-based rebates should only be offered when benefits exceed costs imposed on other sectors (H43) | positive net welfare implications (D69) |