Why the Democrats' Cap-and-Trade is Far Better than McCain's

[Imperialism Inc.]

Why the Democrats' Cap-and-Trade is Far Better than McCain's
http://prospect.org/cs/articles?article=why_the_democrats_capandtrade_is_far_better_than_mccains

With McCain now on board for a "cap-and-trade" system, it's a certainty that we'll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions which will drop annually. The "trade" part of the equation is that companies finding efficient ways to cut emissions can sell the unused portions of their permits to others.

But look more closely and you see a big difference between McCain and the Democratic candidates on how the permits are allocated. McCain's proposal would give the lion's share to companies that are now the biggest polluters. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters face the largest challenges in cutting emissions.

By contrast, Senators Obama and Clinton have both proposed allocating permits through an auction. Under this system, every company ¬ large or small would have to buy rights to pollute. As a result, the biggest polluters would have to pay the most -- thereby providing them with the greatest incentive to cut emissions right from the start.

This makes more sense. After all, our atmosphere belongs to all of us, and polluters should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn't the same principle apply when industries use the biggest common resource of all? The money they pay for permits could be returned as yearly dividends to every American family.

(more at link)

How to limit carbon emissions? A tax, give away permits, or sell permits?

Both Obama and McCain's plans are market based solutions where permits are traded by companies. McCain's plan however starts by giving away the permits for free. Philosophically this is wrong. The environment/atmosphere belongs to us all. If you are going to pollute it you should have to pay the public for the costs we will incur from your actions. Not under McCain's plan. Under his plan the biggest polluters get the most permits. In a way they actually get rewarded. They are given permits for free. If they end up not needing them all then they can sell them at a profit! They will be selling our atmosphere when it wasn't theirs to begin with. Though under a plan to sell permits, like Obama's, they can still resell the permits at least they had to buy their rights to use our air first! Another problem is that by making the permits free there is less incentive for the economy as whole to reduce emissions below the cap.

Because of that Obama's plan is better than McCain's. Personally I think using a tax is even better than both. The problem is that permit markets are potentially inefficient and exploitable. Imagine a big company buying up permits to limit the entry of new competitors in their line of business or just the simple fact that it will take time for markets to reach equilibrium prices. Do we really want carbon market bubbles and busts? Some say that permits would give environmental groups the opportunity to buy up permits and then throw them in the trash so that no one can use them. I am doubtful that the government would allow that to happen. Once they realized it was they would just print more permits to replace the ones that got thrown away.