Give All Permits to Polluters Plan

Auction All Permits to Polluters Plan

Other Emissions Allocation Plans and Conclusions

A Comparison of Proposed Initial Allocation Schemes

My previous blog entry, Understanding Cap and Trade through Example, Part 1, described how CO2 emissions associated with the generation of electricity from different types of inputs (coal, natural gas, renewable resources) are calculated, how utilities achieve reductions in emissions, and how under the requirement that utilities must reduce emissions, they are better off if they can buy and sell rights to pollute, as opposed to being forced to retool operations so as to achieve reduced emissions on their own.

My next blog entry, Understanding Cap and Trade through Example, Part 2, presented a couple of different initial allocation scenarios for rights to permit, discussed how the costs of achieving emissions reductions varied under the different scenarios, and established that the same pattern of pollution would result under all scenarios, equivalent to that in the minimum cost scenario, but payments for rights to pollute among the utilities will vary across scenarios, depending on the initial allocation of permits.

This blog entry will examine specific proposals for initially allocating emissions permits to polluters and see how their end results differ.  Various emissions reduction plans have been proposed:

• Give all permits to polluters;
• Give some permits to polluters and auction the remaining permits to polluters;
• Auction all permits to polluters and have government keep the proceeds; or
• Auction all permits to polluters, but return some of the proceeds to the public.

I think it would help to provide a couple of points of clarification:

First, in the example I’ve been using in this series of examinations of cap and trade, I have assumed the decision has been made to reduce emissions by 13% or 300,000 tons, from a total of 2,972,000 tons of CO2 down to 1,972,000 tons.

The number of permits to pollute at issue in the proposals (“all permits”) corresponds to the tons of emissions utilities will end up emitting after the 13% reduction.  That is, the number of permits to be allocated corresponds to the 1,972,000 tons of emissions that will be left after the utilities have decreased their original levels by the 300,000 tons.

Second, common practice is to assign rights to emit based on historical levels of emissions, both at the regional level, as well as at the source emitter level.  In other words, for the proposed reduction plans listed above, I assume that the default is to assign emission rights to emitters as per the proportional reduction scenario described in Part 2.