There’s one thing I don’t get about how Cap and Trade works. How carbon emissions would still come down, whether the initial allowances were auctioned or free. Most environmentalists are up in arms over “polluting industry getting free allowances” while I don’t object to anything that sweetens the deal. But would it work?

So I contacted Harvard’s Robert N. Stavins to get a very simple concrete example. He has authored much referenced works on environmental policy design and Cap and Trade legislation draws heavily on his work. Here’s his analogy in which TV or video gaming stands in for carbon emissions. First, you set a Cap. The limit will be 4 hours total, with a Cap of one hour max for each child. Here’s how he put it.

“If I put in place a system whereby you have to have an allowance for every hour of video games tonight, it does not matter whether you bought it or got it for free, it still limits you to one hour.  Period.”

He added: “And if you are allowed to trade these allowances with others, you have the same incentives to sell your allowance if you don’t want to play any video games tonight; or to buy more if you want to play more than one hour, regardless of whether you had to buy or got for free the first one.”

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