Editing Emissions trading (section)

===Incentives and allocation===
Emissions trading gives polluters an incentive to reduce their emissions. However, there are possible [[perverse incentive]]s that can exist in emissions trading. Allocating permits on the basis of past emissions ("grandfathering") can result in firms having an incentive to maintain emissions. For example, a firm that reduced its emissions would receive fewer permits in the future (IMF, 2008, pp.&nbsp;25–26).<ref name=imf>{{Cite web
|url=http://www.imf.org/external/np/pp/eng/2008/022208.pdf
|date=March 2008
|author=IMF
|title=Fiscal Implications of Climate Change
|publisher=International Monetary Fund, Fiscal Affairs Department
|access-date=2010-04-26
|archive-date=2010-08-06
|archive-url=https://web.archive.org/web/20100806180316/http://www.imf.org/external/np/pp/eng/2008/022208.pdf
|url-status=live
}}</ref> There are costs that emitters do face, e.g., the costs of the fuel being used, but there are other costs that are not necessarily included in the price of a good or service. These other costs are called [[external cost]]s (Halsnæs ''et al.'', 2007).<ref>{{Cite book
|year=2007
|contribution=2.4 Cost and benefit concepts, including private and social cost perspectives and relationships to other decision-making frameworks
|title=Framing issues.
|series=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change
|editor=B. Metz
|publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.
|author=Halsnæs, K.
|page=6
|url=http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch2s2-4.html
|access-date=2010-04-26
|display-authors=etal
|display-editors=etal
|archive-url=https://web.archive.org/web/20100502210408/http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch2s2-4.html
|archive-date=May 2, 2010
|url-status=dead
}}</ref> This problem can also be criticized on ethical grounds, since the polluter is being paid to reduce emissions (Goldemberg ''et al''., 1996, p.&nbsp;38).<ref name=goldemberg/> On the other hand, a permit system where permits are auctioned rather than given away, provides the government with revenues. These revenues might be used to improve the efficiency of overall climate policy, e.g., by funding [[Efficient energy use|energy efficiency]] programs (ACEEE 2019)<ref>{{Cite web|url=https://aceee.org/white-paper/carbon-tax-010319|title=State and Provincial Efforts to Put a Price on Greenhouse Gas Emissions, with Implications for Energy Efficiency|last=eschwass|date=2019-01-02|website=ACEEE|access-date=2019-01-08|archive-date=2019-01-09|archive-url=https://web.archive.org/web/20190109012007/https://aceee.org/white-paper/carbon-tax-010319|url-status=live}}</ref> or reductions in [[distortion (economics)|distortionary]] taxes (Fisher ''et al''., 1996, p.&nbsp;417).<ref>{{Cite book
|year=1996
|author=Fisher, B.S.
|contribution=An Economic Assessment of Policy Instruments for Combating Climate Change
|title=Climate Change 1995: Economic and Social Dimensions of Climate Change
|series=Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change
|editor=J.P. Bruce
|publisher=This version: Printed by Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.. PDF version: IPCC website
|url=https://archive.org/details/climatechange1990000unse_h1m9
|isbn=978-0-521-56854-8
|display-authors=etal
|display-editors=etal
|url-access=registration
}}</ref>

In Coase's model of social costs, either choice (grandfathering or auctioning) leads to efficiency. In reality, grandfathering subsidizes polluters, meaning that polluting industries may be kept in business longer than would otherwise occur.<ref>{{Cite web |title=Air Pollution Regulation and Grandfathering |url=https://www.cato.org/blog/air-pollution-regulation-grandfathering |url-status=live |archive-url=https://web.archive.org/web/20240308203107/https://www.cato.org/blog/air-pollution-regulation-grandfathering |archive-date=March 8, 2024 |access-date=2025-02-28 |website=www.cato.org}}</ref> Grandfathering may also reduce the rate of technological improvement towards less polluting technologies (Fisher ''et al.'', 1996, p.&nbsp;417).

William Nordhaus argues that allocations cost the economy as they cause the under utilization an efficient form of taxation.<ref name="nordhaus_taxorno">{{Cite web
 |url=http://www.er.uqam.ca/nobel/r25314/cours/ECO8071/Articles/NordhausToTaxOrNotRevEnvEcAndPol07.pdf 
 |last=Nordhaus 
 |first=William 
 |title=To Tax or Not to Tax: Alternative Approaches to Slowing Global Warming 
 |year=2007 
 |publisher=Oxford University Press 
 |access-date=2010-04-28 
 |url-status=dead 
 |archive-url=https://web.archive.org/web/20110725175014/http://www.er.uqam.ca/nobel/r25314/cours/ECO8071/Articles/NordhausToTaxOrNotRevEnvEcAndPol07.pdf 
 |archive-date=2011-07-25 
}}</ref> Nordhaus argues that normal income, goods or service taxes distort efficient investment and consumption, so by using pollution taxes to generate revenue an emissions scheme can increase the efficiency of the economy.<ref name="nordhaus_taxorno"/>

'''Form of allocation'''

The economist [[Ross Garnaut]] states that permits allocated to existing emitters by 'grandfathering' are not 'free'. As the permits are scarce they have value and the benefit of that value is acquired in full by the emitter. The cost is imposed elsewhere in the economy, typically on consumers who cannot pass on the costs.<ref name="garnaut">{{cite book |last=Garnaut |first=Ross |url=http://www.garnautreview.org.au/chp14.htm#14_3 |title=The Garnaut Climate Change Review |publisher=Cambridge University Press |year=2008 |isbn=978-0-521-74444-7 |contribution=Releasing permits into the market |access-date=28 April 2010}}</ref>