Caps and such

I have been quite skeptical of carbon trading mechanisms (i.e. "cap and trade") because of what seem to be their obvious flaws (administrative challenges of a complex new system, influence on permit allocation by special interests).

However my interest has been peaked by discussions of the "cap and dividend" approach developed, in one variation, by Peter Barnes and described on Dot Earth. What I find the most fascinating is not the dividend part itself (although I am relieved by his proposal of a progressive dividend and retaining some of the permit income for technology research/implementation) but Barnes' description of the relative administrative simplicity of a cap and dividend approach in comparison to a carbon tax. He does sell the "upstream cap" quite well.

Additionally, on a more testable level there we have a lot of evidence from the European experience on how to successfully (or unsuccessfully) implement a cap and trade program. Largely the European program has been a pioneering success (a conclusion supported by a detailed MIT study (PDF)), with the exception of the permit distribution process leading to, in the opinion of some, a legal "right to pollute" and the steep devaluation of the permits (as depicted in the graph).