Question: In June of 2009 the U.S. House of Representatives passed H.R. 2454, which introduced a "cap-and-trade" system to reduce carbon emissions associated with global warming. The federal government will issue a fixed number of allowances, each of which permits the holder to emit a ton of carbon dioxide over the next year. As time passes the annual issuance of allowances will fall to reflect declining carbon emissions targets. An allowance holder may surrender its allowances to government after emitting its quota of carbon dioxide or it may sell them on a market to entities that want the right to emit more of their own. There are two possible ways to allocate the allowances initially. Government can either auction them or give them away.
a. True or false? An economist would expect that regardless of whether the allowances are initially sold or given away their final distribution among firms that emit carbon dioxide will be the same. Explain.
b. Some large emitters (e.g., oil refiners and electricity generators) are on record as favoring giveaways because they consider their products to be necessities. They claim that paying for allowances will raise the prices of their products, but if they get the allowances for free the prices of their products will not be affected. Does this make sense? Explain.