Allowance Allocation Alternatives

Dallas BurtrawResources for the Future

February 28, 2005Sustainable Energy Roundtable:

“Multi-Pollutant Legislation”

Three Generic Approaches

Historic Updating Auction

Three Generic Approaches

Historic Updating Auction

SO2

Most states for NOx

Lead phase-outSome states for NOx

Sweden NOx tax

Spectrum VA for NOx

Historic Updating Auction

Three Generic Approaches

Important Subtleties

Historic Updating Auction

Input(Btu)

Output(MWh)

Important Subtleties

Historic Updating Auction

Input(Btu)

SO2

Some states for NOx

Spectrum VA for NOx

Output(MWh)

Some states for NOxLead phase-outSome states for NOx

Sweden NOx tax

Important Subtleties

Historic Updating Auction

Input(Btu)

SO2

Some states for NOx

Spectrum VA for NOx

Output(MWh)

Some states for NOxLead phase-outSome states for NOx

Sweden NOx tax

Common formula across fuels, sources?

Decision / Research Criteria

1. Efficiency• Auction always best.• Second-best (historic) depends on regulation in

electricity sector.• However, with ‘3P’s the distinction is not great.• Importance is as precedent for CO2 where social

cost can be cut in half or more with auction.

Decision / Research Criteria

2. Compensation• Producers vs. Consumers.• Different producer interests

• Existing coal• Gas, new sources.

• Principles:• Political compromise.• Time is compensation.• Possibility for over-compensation

(not likely for ‘3P’).

Preferred Method of Allocation

Consumers Existing Assets New AssetsCoal Gas Non-

emittingAll All

Updating Historic Historic (for 3P)

Auction Historic Updating/Auction

• In competitive regions the auction does relatively better. This is due to the resource mix.

• A move to competition makes historic more profitable for emitters.

Decision / Research Criteria

3. Incentives for Technical Change• Motivation supports updating & auction.• We’ve looked at insufficiently.• Auction could be most potent –

Depends what is done with auction revenues.

For More Information

www.rff.org/multipollutant