The polluter doesn’t pay after all

Today the UK government begins its sale of 4 million carbon permits, equivalent to the right to release 4 million tons of carbon into the atmosphere. The sale is to electricity producers.

Despite the fact that this is a sale, not a giveaway, the permits are effectively free, because the public - you and me - have already paid for them.

Last year the power generators were given the permits for free - just to get them interested. (Apparently the alternative of being refused permission to sell electricity wasn't sufficient incentive to cough up.) But they passed on the 'cost' of these permits - i.e., the nominal price - to us consumers anyway. So even though they were free, electricity prices went up to reflect the cost of permits!

What does that mean? It means that this year the power generators have a large wad of cash - taken from us last year - with which to pay for permits. And they will of course pass this year's costs on to us too - which means that next year, they will again have a nice wad of cash - taken from us this year - with which to pay for permits. And so on, and on, forever.

In other words, unless the price of permits goes up radically or they need to buy a lot more, they will never pay for the pollution they cause. The polluter pays only for the marginal changes – it’s the polluted who pay the bulk of the costs.

Don't markets work well - especially if you control the market?