A cap-and-trade program for greenhouse gas emissions would provide economy-wide incentives for households and businesses to reduce their consumption of energy and energy-intensive goods and services. Those incentives are crucial to the program's success in minimizing the cost of achieving the desired cap on emissions. The chapter by Burtraw, Walls, and Blonz offers valuable insights into the potential efficiency cost associated with allocating emission allowances in a manner that undermines incentives for households and businesses to reduce their emissions. As a case study in current policy, the authors consider the implications of allowance allocations to LDCs providing electricity, natural gas, and home heating oil in 2015 under the provisions of H.R. 2454, the American Clean Energy and Security Act of 2009, which was passed by the House of Representatives on June 22, 2009.

Burtraw, Walls, and Blonz assumed that those free allocations, which would account for 41 percent of all emission allowances provided under the act in 2015, would offset the price increases that the customers served by those LDCs would otherwise have faced under the cap-and-trade program. As a result, the authors found that allocations to LDCs would raise the price of allowances by $4.38 compared with what the price would have been if policy makers had given the allowances away in a manner that did not reduce incentives for households and businesses to conserve energy.