Check out the CBO Economic and Budget Issue Brief: Trade-Offs in Allocating Allowances for CO2 Emissions. The purpose is to determine the distributional impacts of various cap-and-trade CO2 permit allocations:
This brief examines how policymakers’ decisions about allocating the allowances would affect the total cost of the policy to the U.S. economy, as well as the distribution of that cost among households in their various roles as workers, consumers, and investors.
Some of the highlights:
Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would. In addition, workers and investors in parts of the energy sector—such as the coal industry—and in various energy-intensive industries would be likely to experience losses as the economy adjusted to the emission cap and production of those industries’ goods declined. Such losses would probably be limited to current workers and investors.
Consumers and workers in the energy-intensive industries will get nailed.
Selling allowances leads to results imilar to a carbon tax:
Selling the allowances and using the proceeds either to cut taxes on earnings from labor or capital or to decrease the budget deficit would strengthen the economy and substantially lessen the total economic cost of the cap-and-trade policy. Depending on the stringency of the cap and the type of tax cut, such an approach could reduce the economywide cost by roughly 50 percent, or perhaps substantially more, some researchers suggest. However, it would not significantly mitigate the costs imposed on certain firms or workers or on low income households.
Giving away allowances is sure to be popular with business firms:
An alternative approach of giving away allowances (or the proceeds from selling allowances) to certain parties would lower their costs, but at the expense of missing the opportunity to greatly reduce the total cost to the economy. Because most of the cost of the cap would ultimately be borne by consumers, giving away nearly all of the allowances to affected energy producers would mean that the value of the allowances they received would far exceed the costs they would bear. As a result, that allocation strategy would increase producers’ profits without lessening consumers’ costs. In essence, such a strategy would transfer income from energy consumers—among whom lower income households would bear disproportionately large burdens—to shareholders of energy companies, who are disproportionately higher-income households.
