Regulation, Allocation, And Leakage In Cap-And-Trade Markets For CO2

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Executive Summary

Among the most contentious elements of the design of cap-and-trade systems for emissions trading is the allocation or assignment of the emissions credits themselves. Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. In this paper the authors develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the "Contingent" allocation of permits, where the allocation is tied to the output, or input use, of plants.

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