TY - JOUR AU - Goulder,Lawrence H. AU - Hafstead,Marc A. C. AU - Dworsky,Michael S. TI - Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program JF - National Bureau of Economic Research Working Paper Series VL - No. 15293 PY - 2009 Y2 - August 2009 UR - http://www.nber.org/papers/w15293 L1 - http://www.nber.org/papers/w15293.pdf N1 - Author contact info: Lawrence H. Goulder Department of Economics Landau Economics Building 328 Stanford University Stanford, CA 94305 Tel: 650/723-3706 Fax: 650/725-5702 E-Mail: goulder@stanford.edu Marc Hafstead SIEPR Stanford University 366 Galvez Street Stanford, CA 94305-6015 Tel: 650-723-2172 E-Mail: mha337@stanford.edu Michael Dworsky 722 Page Street #2 San Francisco, CA 94117 E-Mail: mdworsky@stanford.edu AB - This paper examines the implications of alternative allowance allocation designs under a federal cap-and-trade program to reduce emissions of greenhouse gases. We focus on the impacts on industry profits and overall economic output, employing a dynamic general equilibrium model of the U.S. economy. The model's unique treatment of capital dynamics permits close attention to profit impacts. We find that the effects on profits depend critically on the method of allowance allocation. Freely allocating fewer than 15 percent of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Freely allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits. These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower than when all allowances are freely allocated and no auction revenue is generated. On the other hand, when auction proceeds are returned to the economy in lump-sum fashion (for example, as rebate checks to households), the potential cost-advantages of auctioning are not realized. Our results are robust to cap-and-trade policies that differ according to policy stringency, the availability of offsets, and the extent of opportunities for intertemporal trading of allowances. ER -