Sightline supports auctioning permits in carbon cap and trade programs. That’s because handing out free permits allows firms to capture windfall profits at the expense of consumers.

While there are misconceptions about the economics of allocation, real world experience in Europe shows us that free permits equate to windfalls for polluters. And there is agreement among economists that free permits and auctioned permits add up to the same costs for consumers. Sightline prepared this memo to explain why.

Why Free Allocation of Carbon Allowances Means Windfall Profits for Energy Companies at the Expense of Consumers

Report contents:

1. Allocation economics: A simple explanation

2. Allocation economics: More detail

3. Windfalls: What Happened in Europe

4. The evidence: A literature review

More from Sightline:

Sightline’s Climate Policy Project

Sightline’s Series on Climate Fairness

February 7, 2008