Updating allowance allocations in cap-and-trade: Evidence from the NOx Budget Program

The level and distribution of the costs tradable allowance schemes are important determinants whether regulation is enacted. Theoretical simulation models have shown that updating allocations based on firm emissions or output can improve efficiency scheme by acting as a production subsidy. Using U.S. NOx Budget Program case study, this analysis tests electricity generators in states which chose an allocation increase their relative to plants fixed allocation. Econometric results provide evidence lead generation for natural gas combined cycle generators, but not coal generators. This effect concentrated low-demand overnight hours varies both local mixture NGCC percentile. These findings imply confers modest meaningful subsidy responses heterogeneous technology market conditions.