How Can One Allocation Provision Undermine a Cap-and-Trade Program?

This paper describes an important exception to the conventional wisdom that allocation decisions do not affect a cap-and-trade program’s societal cost. While this wisdom holds for many types of allocations, it does not apply to conditional allocations in which the number of allowances that a firm receives is conditioned on the firm’s future operational or investment decisions. To demonstrate this point, this paper examines an allocation provision in the draft of the Lieberman-Warner Climate Security Act of 2008 that was reported out of the Senate Environment and Public Works Committee in December 2007 (the Lieberman-Warner bill).

Jaffe, J. ."How Can One Allocation Provision Undermine a Cap-and-Trade Program? Section 3902 of the Lieberman-Warner Bill Offers a Warning about Risks in the Allowance Allocation Debate." Reg-Markets Center, Regulatory Analysis 08-02, Apr 2008.