Short answer: sometimes

Long answer:

The Independent reported this week that the U.K.'s biggest polluters would reap over £6 billion in windfall profits from the EU ETS, the European emissions trading system set up under the Kyoto Protocol. This is up from the £1 billion predicted by BBC News in May 2006. In other words, the companies that pollute the most are making billions off of the system designed to reduce their emissions. Seems a bit counterproductive, no? In truth, it is exactly that. Emissions trading can be great; no other market mechanism (save for the unpopular carbon tax) can efficiently internalize the true cost of greenhouse gas emissions into our economy. But the design of the system, and the finesse of its creators, can make or break its effectiveness, and a poorly designed cap-and-trade scheme can effectively have a reverse effect.

Let me explain. When a cap-and-trade system is introduced, the affected members of industry, the major polluters, each attain a particular number of allowances, which represents the amount of greenhouse gas emissions they are allowed that year. If a polluter emits less than the number of allowances it holds, it can sell the excess allowances to other polluters who emit more than their share. However, one of the primary questions in designing a cap-and-trade system is how to get the allowances in the hands of the polluters. Do you give them allowances based on, for example, their historic emissions? Or do you hold an auction and force polluters to purchase as many offsets as they deem necessary?

The EU ETS allocates almost all of its allowances for free. These allowances can then be traded among polluters in order for the overall cap to be maintained. Any of those who can reduce their emissions below the number of their permits can then sell the remainder off, earning a profit. By allocating permits for free, we are essentially handing out valuable commodities. But if we give the most allowances to the companies that pollute the most, we are simply providing them with the most opportunity for windfall profit. And profit they have, as the report from The Independent shows. More importantly, though, the EU has seen emissions rise during the EU ETS, rather than fall (Citizen's Guide to Carbon Capping).

The alternative is to auction a significant portion of the credits, forcing companies to pay for their rights to pollute. The revenue from the auction can then be used to shelter low-income families from the higher cost of energy, or for investment in renewable energy and energy efficiency. Many experts advocate a virtually 100% auction, where almost all permits must be purchased by polluters. Presidential candidate Barack Obama, for example, emphasized the need for a 100% auction during the New Hampshire debate Saturday evening. Others suggest that the allocation of permits should be a mix of giveaways and auctions. For example, The National Commission on Energy Policy (NCEP), a bipartisan group of 20 of the nation's leading energy experts (including members of the electric and oil industries), advocates a roughly 50% auction:

The number of allowances available on an economy-wide basis under a greenhouse gas trading program will be more than adequate to both compensate major energy–related industries for any short-term economic dislocations incurred as a result of the program, while also providing substantial resources to address other policy concerns arising from the transition to a lower carbon economy. Accordingly, we have proposed an initial allocation where roughly half of overall allowances are auctioned or otherwise directed to investment in advanced energy technologies and to mitigating impacts on low-impact consumers…Over time, the share of allowances distributed at no cost should diminish in favor of a more complete auction. – NCEP Energy Policy Recommendations to the President and 110th Congress (PDF)

It is too late to change the EU ETS. But the U.S. appears to be heading toward cap-and-trade, and the auction vs. allocation issue is set to take center stage. The Lieberman-Warner bill, which has so far gained the most momentum, begins with a 55% giveaway and slowly increases the auction percentage. This is a far cry from some of the early cap-and-trade bills introduced to congress, which mostly included only enough auctioned permits to cover the administrative cost of the programs themselves. However, it is not enough. Even a 50% giveaway has the potential to allow windfall profits, and with the climate crisis in such a state of urgency, we need to advocate a stronger cap-and-trade system for the U.S.

Let's not use climate change as an excuse for getting more money in the hands of those who need it least.