Cap and Trade Reduces Pollution No Matter Who Gets the Permits

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"Cap and Trade Reduces Pollution No Matter Who Gets the Permits"

There’s a somewhat unfortunate strain of left-wing criticism of cap-and-trade that seems based largely on not understanding how cap-and-trade actually works. Paul Krugman, for example, today notes that the great climate scientist James Hansen seems to have a number of erroneous views on this subject.

One point that I think deserve special emphasis, because I’ve spoken to many people who are confused about it, is that the point needs to be made that in terms of environmental impact, it doesn’t matter who you give carbon permits too. When the government sets a cap on carbon dioxide emissions, the overwhelming environmentally relevant issue is just “how low is the cap.” Everything beyond that is about money and economics, don’t environment and the atmosphere. The reason is that once you cap emissions, the right to emit becomes a valuable thing. If the government auctions off the permits, then the government gets the money and can spend it on something useful. If the government gives the permits away to me, then I’m going to sell them and get rich. If the government gives the permits away to polluters, then some polluters will keep on polluting just as they would under the auction scenario, except they’ll be spared the cost of actually buying the permit. And other polluters are going to realize that the cost of reducing pollution is less than the money they can earn by selling permits.

However you do it, pollution is reduced. If the cap is aggressive, it’s reduced a lot. If the cap is timid, it’s reduced a little. The allocation of permits is an issue of who bears the costs of reducing pollution, it has nothing to do with the extent of the pollution reduction. In general, auctioning the permits is more economically efficient and thus a generally better idea, but it’s a total wash environmentally. The fact that some politically powerful subset of polluters may reap a financial reward is unfortunate, but not actually relevant to the climate issue.

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