More on cap-and-trade systems

Here’s a clear demonstration of why, in a cap-and-trade system, grandfathering emissions rights to historic polluters is a terrible idea:

The UK’s biggest polluters will reap a windfall of at least £6bn from rising power prices and the soaring value of carbon under the new European carbon trading scheme …

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Critics argue … that the scheme, under which nearly all allowances are granted free of charge rather than having to be bought by big polluters, has created a distorted market in which the worst offenders will enjoy bumper profits while incurring no extra underlying cost for producing greenhouse gases.

That’s just about right: handing out pollution rights for free, as the European emissions trading system did, creates the potential for massive, unearned windfall profits.

Permits will have a market value — someone will want to buy them. So when we hand out emissions permits at no cost, we’re essentially handing out free money.

There may be a few exceptions to this rule: a few economic sectors where free allocation won’t lead to windfall profits. But they’re the exceptions. The rule (as demonstrated in Europe) is that grandfathering is great for polluters, and bad for consumers.

So maybe that’s why lots of big oil and coal companies are so supportive of grandfathering …