A report by Brattle consultants examines the economic and policy implications of different carbon dioxide (CO2) allowance allocation approaches under the Clean Power Plan’s (CPP) mass-based standard and/or carbon-cutting programs. The report recommends that if the primary objective for state policymakers is to minimize customer bills while reducing CO2 emissions in accordance with the CPP goals, allowances or auction revenues should be allocated directly to customers or programs that directly benefit customers.

One of the options states have for CPP implementation is to set a mass-based limit on total CO2 emissions from all covered electric generating units (EGUs) in the state. As part of these implementation plans, state regulators will need to determine how emissions allowances are initially distributed, whether by free allocation to individual entities or by centralized auctions to compliance entities. With substantial economic value at stake, the initial allowance distribution will have financial consequences for generation owners and electricity customers, including homes and businesses.

The authors argue that when designing an implementation plan that includes the initial allowance distribution, policymakers should first design a plan that reflects overarching policy objectives, and then later consider the implications of individual constituents within the state. The report notes that by deferring any examination of wealth transfers among interested parties to a later stage, policymakers will be able to focus on achieving the best outcomes, consistent with their state’s policy objectives.

“State policymakers should carefully consider the intended or unintended economic incentives that may be introduced when crafting the allowance allocations approach,” notes Judy Chang, a Brattle principal and co-author of the report. “The dollar value of incentives from free CO2 allowance allocations should be evaluated just like other customer-funded programs, given that one of the alternatives is to allocate the allowance value back to customers.”

The Brattle report recommends that states examine the potential impacts of several approaches to mitigate any adverse outcomes when deciding on the initial distribution of allowances. For example, if they are not appropriately designed, generation-based allocation approaches can introduce unintended inefficiencies, such as incentivizing uneconomic fossil plants to stay online only to continue receiving CO2 allowances. The report also provides guidance on how states can maintain appropriate incentives to invest in energy efficiency, distributed generation, and trade-exposed industries.

Starla Yeh, a senior policy analyst with the Natural Resources Defense Council (NRDC), adds, “The relative impacts to customers and generators will vary based on the way a state crafts its allocation approach. The ability to determine the way allowances are allocated provides states with a meaningful opportunity to benefit in-state residents and businesses.”

The report, “CO2 Allowance Allocation Options: Considerations for State Policymakers When Developing Mass-Based Compliance Strategies Under the Clean Power Plan,” focuses on using allowances to mitigate energy customer impacts. The report is prepared for the NRDC and authored by Brattle Principals Judy Chang and Kathleen Spees, and Research Analyst Tony Lee. It is available for download below.

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