An article by Adolf Stroombergen (from Infometrics) discusses how NZ is going to meet its obligations under the Kyoto protocol. First Adolf discusses the merits of a Pigovian tax as a way to cover our obligations. One line I particularly enjoyed was:
“However, even if a tax has no effect on emissions, it is still fairer to put the cost of emissions on those who cause them than to put the cost on taxpayers generally.”
So damn true! Having established what the government should do, he then goes on to discuss what they actually will do, an emissions trading system. While a emissions trading system could, in theory, be as efficient as a tax, governments around the world have taken the strange measure of given out emissions permits for free, instead of auctioning them and using the money gained to pay off the Kyoto obligation. The reason given for this in the article is that it is fair to compensate industries where investment has occurred only on the basis that producing carbon was free.
However, I think I see it a little differently. If an established firm can only stay in business when carbon emissions are free, then they are socially inefficient. So the only way the firm can stay in business is if it makes society bear some of the cost of their production decision. That seems unfair to me. As a result, I think that emissions permits should be auctioned by the government in almost all cases. The only time I see scope for them to be given away for free is when we have an infant-industry, one which would be able to pay for the full cost of their production activity in the medium term.