The problem with grandfathering permits
Posted by Rich Sweeney on February 18, 2009
One alternative to auctioning off carbon permits under a cap and trade program is to give them away based on past usage. This is often promoted by industry groups as a way of gradually easing in carbon regulation without rocking the boat too much early on. Recently this notion has also been promoted in the EU as a way of providing compensation to industries that experience a significant decrease in international competitiveness due to domestic climate policy (similar measures are also being discussed by unions in the US). However, one of the problems with output based permit allocation is that it creates an incentive for actors to alter their behavior in the period(s) prior to setting the allocation. For example, if carbon permits were simply given out proportionally based on firms’ share of total carbon emissions in the previous year, there would be a huge incentive to be as dirty as possible.
A good example of this phenomenon was reported in the WaPo on Saturday, in “Waterman Inflated 2008 Crab Harvest Figures”. Basically Maryland officials determined that reported blue crab hauls for 2008 were wildly inflated. While the watermen have claimed its simple human error, its appears that the state sees an attempt to influence future catch limits. From the article, “State officials said the discrepancy was probably caused by watermen overstating what they’d caught. One likely reason, they said, was that some thought the state would use the catch from 2008 to set future limits on crabbing — that a big catch last year would lead to a higher quota later.”
H/T to Dave Evans.