A critical question in climate debate

Of course, the scalper would much rather get his tickets for free - and that's precisely the point. Polluters are financially much better off if permits are given away instead of auctioned, but the cost of cutting emissions and the resulting effect on energy prices will be the same no matter how the permits are delivered.

Giving permits away allows polluters to raise their prices without raising their costs. It would transfer hundreds of billions of dollars every year from consumers and businesses to polluters - energy companies and their stockholders. No wonder the energy companies are lobbying for grandfathered permits.

But the rich-get-richer distribution of wealth is not all that is at stake. Cap-and-trade systems and the associated higher energy prices, while effectively reducing pollution, can cause some drag on the economy, slowing job creation and economic growth. We can use revenues from auctioning permits to cut taxes and promote economic growth, invest in energy efficiency and create jobs, or put them to other productive uses. If permits are grandfathered, the economic effects of a cap-and-trade system end with higher energy prices and the problems that come with them.

The European Union has implemented a cap-and-trade system that has largely failed because it gave away almost all of the permits. As climate policy discussions heat up in Congress, we need to remember that how permits are distributed is almost as important as the emissions cap itself.

To prevent windfall profits for polluters, affirm the public's right to compensation for pollution and accelerate growth, climate policy should use cap-and-auction to reduce emissions.

Kristen Sheeran, a professor at St. Mary's College of Maryland, is director of the Economics for Equity and the Environment network. James Barrett is executive director of Redefining Progress.