In 2007, during his presidential campaign, President Obama told Grist:

I believe that, depending on how it is designed, a carbon tax accomplishes much of the same thing that a cap-and-trade program accomplishes. The danger in a cap-and-trade system is that the permits to emit greenhouse gases are given away for free as opposed to priced at auction. One of the mistakes the Europeans made in setting up a cap-and-trade system was to give too many of those permits away. So as I roll out my proposals for a cap-and-trade system, I will price permits so that it has much of the same effect as a carbon tax.”

(Thanks to Greg Mankiw and his must-read op-ed in the NY Times)

Approximately 2,340 energy lobbyists worked on the cap-and-trade bill to do what President Obama said we shouldn’t – hand out allowances costs to utilities and other industries direct revenue to them. Opposition to this huge energy tax bill wheeling, dealing and arm-twisting to eke out the narrowest of majorities. They promised generous handouts for various industries and special interests but, in typical Washington fashion, they gave away more than they had.


As shown by the chart above, for the years 2016 and 2017, Members of Congress gave away 100.7 percent and 100.2 percent of the allowance allocations, respectively. Electric utilities are the biggest winners of the government allowances sweepstakes, while giveaway for natural gas, home heating oil and refineries are relatively small. The bill guarantees that the revenues from 15 percent of the allowances sold at auction will go to low-income consumers. Other allowance revenues go to investments in clean energy as well as domestic and international adaptation efforts to offset the supposed damage from global warming.  Notice how the cost of allowances rise dramatically as the caps on carbon and other greenhouse gases become more stringent.

Free allowances are not an exception to the “no free lunches” maxim. Giving away allowances does not lower the costs of cap and trade; it merely shifts the costs around. Congress can play musical energy with Byzantine allowance-allocation schemes, but when the record stops, average energy prices have to go up enough to cut energy use dramatically.

Cutting the pain for one group simply multiplies the pain for another.