Hate to sound like a stick in the mud, but trading doesn't work and always leads to corruption, bad policy, and it undercuts needed gains in the system.  Just do caps with no trading.  Seems simple to me!  Why on Earth should we even consider market trading?  It really doesn't work.  It was a sham even with sulfur dioxide.  Nobody is trading NOx except a few weirdos.  Why do it?  You have just given me another reason to avoid the entire cap and trade system.  Just give us a limit let's be done with it - the best one yet.  /sam

Onward through the fog

Sam:  I'll be my own stick in the mud here, but I think you're dead wrong.  The price for SOx has collapsed since they started trading, and is now well below what anyone was projecting it would be.  That doesn't happen without lots of smart individual actors trying to make a buck trading.  NOx too - although both of those markets have been greatly limited by virtue of the fact that the most cost-effective solutions can't participate.  (Indiana and New York are the only two states that have allowed energy efficiency to participate in NOx markets - by earning a credit for displaced NOx from the offsite reductions at power plants when you consume less power.  In all other jurisdictions, you can only participate by installing end-of-pipe controls, which have far greater costs.)

But broadly speaking, I'd say that a regulatory model that has a cap but no trade is essentially Soviet.  Smart regulators figure out how much bread we need, what the price ought to be and set it.  And if you're not a bread supplier, you can't play.   Hello, bread lines.  

(This is, at core, no different from US utility regulation where smart regulators set power price and supply and allocate capital for generation.)  Are markets perfect?  Of course not.  But - provided the regulator ensures that they remain competitive - they are a hell of a lot better than any alternative.

That said, we would be far better served by moving on from the cap & trade / allocation vs. auction debate and to one that simply sets output based standards... but that is the subject for another post.

Reason why SO2 and NOx credits never worked is because they were supposed to trade high and have value. SOx credits were estimated at $700/ton and went to nearly nothing. That is not good, since it was only worth peanuts, and had no impact on the market. So you could buy a whole bunch of SOx credits for almost nothing, increase your emissions, and trade up for maximum allowable emissions with little real environmental benefit. That's because new sources were buying from old grandfathered sources that shuttered with HUGE allowables. It you say it is good, please convince me.

It's OK and there reference to the "soviet style" was amusing - the entire Clean Air Act must be commie - but please tell us of some other market-based approaches that can be considered.

The reason I say this is because a Bush proposal for cap & trade on mercury at large coal powerplants was found to actually make the problem worse. The EPA's own modelers and consultant reports proved this.  Why would CO2 be any different? It is a very legitimate, contentious issue I am raising here, not some "Sammie" hair-brained comment.  Thanks!

Onward through the fog

A sure sign that markets are working is that the price is going down.  If you went to the grocery store tomorrow to buy milk and found that it cost you $100 to buy a gallon, my guess is that your first thought would be that someone had figured out a way to get around the market, no?

Same for SOx and other tradeable allowances.  If you can't lower sulfur cheaply, you can't participate in the current market.  But that should not be confused for thinking that the sulfur is not being reduced.  (Yes, we could have done better, but the primary flaw I see with the sulfur market is that old plants were grandfathered out of compliance, not that the market system wasn't working.)  

So I wouldn't say that those credits were "supposed to trade high and have value".  They were supposed to reduce emissions.  If we could reduce those emissions at lower cost, that's good, no?  

The same will happen with carbon, once we finally get the balls to move, because - unlike SOx and NOx - it is idiotically expensive to remove carbon at the "end of the pipe".  Simply too much of it.  So a market based system will drive people to remove it at the front of the pipe, by burning less fuel.  And fuel costs money.   Ergo, lowering carbon emissions will save money.  Put a price on it, cover the entire economy, and you will immediately find that people who can lower carbon at a negative cost will make bucketloads of cash.   Which is good, because bucketloads of cash will attract more people to a market where you can make bucketloads of cash.  

Meanwhile, people who can only lower carbon by spending money will cry on the sidelines.   At which point, I hope we all gather together to kick 'em while they're down!  After all, I would much rather be in a position where our country is lowering carbon, growing it's economy and stealing jobs back from those laggards (read: China) who thought that CO2 control was too expensive to try than the alternative.

How about a hybrid system.

In the first place allocate emitters with leasehold permits at a government set price, reviewed annually.
Reduce the CO2 values of these over time.
Let emitters subsequently acquire leasholde permits from the leasehold pool, at which point leaseholders must either relinquish them or buy them competitively.
By carefully controlling the rate of transfer of leases, the devaluation rate, and if necessary the issue of additional permits, the government should be able to steer toward a target price per carbon, a target national CO2 emission target, prevent a windfall to polluters, and reap profits to be spent on mitigation, energy infrastructure and research.

When i say "acquire leasehold permits from the pool" I mean that the permits would then be privatized and the purchaser would then be able to freely on-sell them at market price.