Kevin Drum takes a crack at explaining the woes of “grandfathering”, and nails it:
If you give away permits [under a cap and trade system], common sense suggests that since there are no additional costs to emitters, they won’t raise their prices. But it turns out this isn’t true. Thanks to the opportunity cost of the permits, they’ll raise their prices just as much as if they’d bought the permit in an auction. (This isn’t just a theory, either. That’s how the European cap-and-trade system worked initially, and prices really did go up. If you want the gritty detail on why it works this way, read this paper.) So: power plants end up raising their prices, but since the emission permits are free their costs don’t change. Result: a huge windfall profit for GHG emitters. Some get more and some get less, but the overall net result is lots of extra profit, with the biggest polluters getting the biggest profit.
Soon enough, if everyone who understands this point keeps repeating it, it’ll sink in. And then—hopefully—the press will stop looking at us cockeyed when we explain that giving permits away for free WON’T help consumers.
But let’s hope it sinks in before Congress, or individual states and provinces, pass some misguided cap-and-trade legislation that gives away lots of permits for free.
