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Auction or Allocate

The great debate over emissions allowance distribution.

Fortnightly Magazine - February 2009

be directed toward a third party ( e.g., federal agencies or states) to decide how to best use revenues from the sale of allowances.

Achieving Policy Goals

Both allocations and auctions can be used to achieve specific policy goals. Policymakers can direct assistance to regulated entities or others via an allocation scheme or use revenues from auctions in any number of ways. These two basic approaches to handling the allowances created by a cap-and-trade program can work alone or in combination.

When making decisions about how to distribute allowances in a cap-and-trade program, it is imperative to remember that the impacts of allowance allocation are distributional. Inevitably, there will be the perception of winners and losers in financial terms based upon which distribution scheme is implemented, but the overall environmental benefit generally is unaffected. In a cap-and-trade program, the emission cap and banking, not the distribution scheme, determines the amount of reductions that will be made. However, this doesn’t mean that the distribution method isn’t tremendously important or controversial. With tens of billions of dollars at stake, allowance distribution in any future nationwide GHG cap-and-trade program certainly will have significant and wide-ranging effects on different regions of the country and different stakeholders. As demonstrated in the past under Title IV and given the magnitude of value and the range of interests involved in any GHG scheme, specific direction from Congress can be invaluable for launching a new program. Then the most important work of reducing emissions can begin.

 

Endnotes:

1. A cap-and-trade program conceivably could shift the point of regulation away from emitters ( e.g., to fuel producers or distributors, who must surrender allowances equal to the emissions that would result from use of the fuel).

2. National Commission on Energy Policy. Allocating Emissions in a Greenhouse Gas Trading System, March, 2007. The figure on page 6 of the report illustrates why there is likely to be a large discrepancy between CO 2 allowance value and mitigation costs at the program’s beginning when reductions are relatively small. Note that the shape of the marginal cost curve dictates the degree to which emissions reductions must exceed remaining emissions before the total mitigation cost surpasses allowance value. See report for details.

3. One notable distinction is that auction revenue goes to the government, whereas proceeds from sales of third-party allocation go to allocation recipients.

4. This concept extends beyond the electric power sector only to the extent that producers are able to pass costs to consumers, which may not be possible in some sectors.

5. Burtraw and Palmer. RGGI Workshop Summary.

6 . The U.S. government does have considerable experience using complex auction procedures for other products it regulates such as electromagnetic spectrum portions, treasury bills, and access to the electricity grid.

7. The first greenhouse gas allowance auction in the United States was completed by the Regional Greenhouse Gas Initiative (RGGI) in September 2008. More information on the auction proceedings and results is available through RGGI.

8. Congressional Budget Office. Issues in Designing