Don't Give Away the Cap-and-Trade Permits!
9 Pages Posted: 15 Feb 2013
Date Written: May 4, 2009
Abstract
Some proposed cap-and-trade systems for carbon dioxide emissions would allocate the emission permits free of charge to firms that have engaged in past emissions rather than selling those permits at auction. Although supporters of free permit allocation contend that it would protect consumers from energy price increases, economic theory and evidence show that it would actually provide windfall gains to stockholders without restraining energy prices. Free allocation would also deprive the government of revenue that could be used to finance reductions in marginal income or payroll tax rates to offset the economic disincentives arising from cap and trade.
Any policy to control carbon dioxide emissions should take the form of a carbon tax or a cap-and-trade system with all permits sold at auction. Much or all of the revenue raised by the carbon tax or cap-and-trade auction should be devoted to income or payroll tax cuts that reduce marginal tax rates or to deficit reduction.
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