U.S. Interest Groups Prefer Emission Trading: A New Perspective

If there is to be environmental regulation, what kind of regulation would the main interest groups then prefer? This political distortion must be taken into account when designing future environmental regulation such as CO2 regulation. The three main interest groups in the U.S. (private business, environmentalist groups and the electricity sector) prefer a grandfathered permit market. Business is attracted by this solution because free initial distribution of permits both favours existing sources financially and, furthermore, creates a barrier to entry for new firms. Environmentalist groups have changed attitudes and promote the idea too as a way of negotiating higher target reduction levels with industry to maintain voluntary contributions from their members. Finally, electric utilities prefer a grandfathered permit market, and this step towards less planned economy may be explained by the rise of competition in the U.S. electricity sector. Therefore, it is suggested that a grandfathered permit market is a more effective policy than a tax in relation to organized interests such as industry, electric utilities and environmental organizations. In perspective, the grandfathered permit market may be mixed with the use of taxes. In the case of CO2 regulation, for example, taxes may be applied to badly organized polluters, such as households and the transport sector, because their lobbying power is weak. Copyright 1999 by Kluwer Academic Publishers