Property Rights Created Under a Federalist Approach to Tradable Emissions Policy

Property rights approaches can be employed to achieve environmental conservation. Two specific topics are examined here: tradable emission permits and conservation easements. The implementation of the tradable emission permits program (also referred to as the federal cap and trade program) for carbon dioxide (CO2) departs from past U.S. environmental policy, which has devolved most regulatory powers over point sources to the states. The cap and trade program formalizes emission permission as a new form of property right. The federal government will assign a CO2 emission budget to each state, and the state will allot the assigned permits to industries by public auction. The permits could then be bought and sold in a federally managed trading program. Dallas Burtraw and Rich Sweeney, the authors, estimate that the total value of the CO2 program in the United States could amount to $130–$370 billion annually by 2015. Thus, the design of the system for allocating tradable emission permits will have significant distributional and efficiency effects on the U.S. economy.

The value created by the CO2 program reflects the cost of reducing greenhouse gas emissions. This cost will eventually be passed along to consumers in the form of higher prices for direct and indirect energy consumption. Burtraw and Sweeney estimate the distributional impacts of these price increases and suggest that CO2 policy could have heterogeneous effects across regions and populations in the United States. For example, low-income households spend a higher proportion of their income on energy consumption than do high-income households.

The authors propose various options to mediate the regressive incidence of the policy, including transferring 65 percent of the revenue generated from auctioning the permits to households on a per capita basis, excluding some basic necessity industries such as the transportation sector from the CO2 program, and providing free allocation to electricity consumers (retail utilities) based on consumption. The authors also project the efficiency and distributional impacts of these options based on simulation models. Their estimates indicate that a nationwide auction program with revenue returned on a per capita basis would be one of the two most efficient approaches among the options reviewed. It will however impose a higher cost of electricity consumption on consumers in the Southeast and the Midwest, which have a relatively large number of coal-fire-generated electricity facilities. If the states allocate the permits to retail electricity consumers without charge, there are smaller deviations among the regions on their net CO2 expenditures; but the estimated price for CO2 increases by 17 percent (from $41 to $48 per mtCO2), indicating an efficiency loss. Based on the results, Burtraw and Sweeney argue that the most likely scenario would be for the federal government to apportion emission allowances to the states with special consideration to the electricity sector. Each state would then auction the allowances and return a portion of the revenue to households.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2008 and is Chapter 13 of the book Property Rights and Land Policies.