One of the thorniest problems in cap and trade programs is deciding how to distribute the carbon permits. Should the public sell pollution privileges or give them away for free?
Some folks worry that if we make polluters pay for carbon permits, they’ll just raise prices for consumers. That’s a perfectly legitimate concern. But unfortunately, it turns out to be true whether or not we sell the permits or give them away for free. Prices rise by the same amount in either scenario. (The only difference is whether polluters reap windfall profits or whether the public earns revenue from selling the permits.) It may be counterintuitive, but it’s true.
It’s also very hard to explain why this is the case without resorting to a lecture on economics. So in an attempt to clear things up, we’ve put together this easy-on-the-eyes summary. It comes in four parts:
- A simple explanation
- A bit more detailed explanation
- A look at Europe’s carbon trading market
- A review of the (basically unanimous) economic literature
Take a look and let us know what you think.