Why Cap-and-Trade Schemes Ought to be Giveaways to Business

Megan McArdle thinks that, morally, we should allocate rights to pollute under a cap-and-trade system by auction, rather than by giving the rights proportionately to those who are already emitting. However, she thinks giving the rights to incumbents makes sense politically.

I disagree about the moral case. "Prior in claim is prior in right" is a precept every legal system uses. By hypothesis, the incumbents had every right to emit prior to the cap-and-trade being put in place, and they made investment decisions in reliance. Allocating a valuable cap-and-trade permit is just providing compensation for an expropriation for public benefit, in just the same way that making private land with an endangered species into a park calls for a cash payment for the value of the land.

Also, from a social-democratic perspective, an auction would probably have the features of a regressive tax. There is no clear distributional impact of giving incumbents tradeable rights to emit.

The one downside is that if you allocated rights to emit to incumbents, and everyone knew that's what you were going to do, then you would create an incentive to increase emissions now. So you should use some past year before the cap-and-trade scheme was seriously contemplated.

Update: That commie Greg Mankiw disagrees.