Greenhouse Gas Allowance Allocation: Cost Pass-Through, Sector Differentiation and Economic Implications

Author(s): Eric Williams

Published: February 2008

download: working paper (.pdf) >

One of the most important decisions to resolve in implementing a cap-and-trade system is the question of how emission allowances are initially allocated to participants. As long as allowances can be freely traded, they can, in theory, be allocated to anyone and will find their way through the market to trading system participants willing to pay for them. Allowances can be given for free in various ways to participants and nonparticipants or auctioned to the highest bidders. Because allowances have significant monetary value, decisions regarding allocation methodologies are important for trading system participants and their customers.