Conor Clarke asks:

A cap and trade bill that gives all the permits to Donald Trump will be just as effective in reducing emissions as a bill that auctions off all of the permits and uses the revenue to fund an across the board payroll tax cut.

I thought this point was expressed very eloquently and at greater length last month by Harvard’s Robert Stavins. So here’s a question: has anything been added to the bill since then that would reduce its effectiveness?

I am not sure what was added when but there are a few things I can say.

First, even in a basic market framework, Conor and Robert Stavins are not technically correct. The distribution of permits does influence the effectiveness of the cap. If permits are distributed into too few hands, some firm or group firms could establish market power and artificially constrict the supply. Similar to the way the concentration of oil reserves in Saudi Arabia allows OPEC to artificially constrict supply.

Ok you say, but that doesn’t sound like a bad thing from an environmentalist’s point of view. The less pollution there is the better. Well, less pollution might not be better as far as society as whole is concerned but we don’t need to argue that. Realizing that pollution permits might be artificially restricted by polluting firms, themselves, reminds us that they are a property right and as such could give rise to my second point.

There will be rent seeking among the recipients of pollution permits. In particular, those who are currently receiving free permits will see it in their interest to maintain their supply of free permits and to maximize the value of those permits. Maximizing the value of permits implies minimizing the alternatives to purchasing permits. The most significant alternatives are new green energy sources and technology which allows fossil fuel produces to capture and sequester their carbon. Giving away permits, therefore, creates a special interest group that will always be opposed to advancing green technology.

While fossil fuel producers might have always been opposed to government investment in competing sources of energy, giving away permits provides them with an incentive to oppose technology which makes their own production greener.

If consumers value green products in and of themselves and there is a feasible technology which could allow fossil fuel producers to produce much lower net emissions then it is conceivable that this version of Waxman-Markey could wind up accelerating climate change. In other words, Waxman-Markey could create special interest groups that stand in the way of green technology that consumer pressure would have brought to market anyway.

The distribution of pollution permits matters because permits are property rights and they carry with them all of the baggage of property rights.