A hot topic in the news these days is whether the cap and trade approach should be incorporated into the United States budget. Cap and trade works to first set a limit on the amount of pollution emissions (the “cap”) and then to open up a market for different firms to sell and buy pollution permits from each other (the “trade”.) The idea behind this approach is that it is efficient in how it minimizes pollution while internalizing the externality, so that government intervention is kept to a minimum.
The problem with this approach, according to a recent New York Times article, is that it works like a tax, in that it limits firms from producing where they want to produce so they charge a higher price and consumers must pay more, and that it redistributes rights to large firms. The simple idea of cap and trade had twisted into a complex system of exemptions in which “those with the most muscle got the best deals,” coining it the new name “tax-and-redistribution.” Instead of auctioning off these pollutions rights, the government was simply giving away rights to big companies.
Senators Maria Cantwell and Susan Collins worked up a new alternative they called “cap and dividend,” in which permits are auctioned off to firms and then rebates are returned to consumers to make up for the higher costs. The success of this bill passing however, will depend on the elasticity of the senators’ support, which is ironically swayed by large firm lobbying.
