There's been a lot of talk in the media and government about cap-and-trade, cap-and-auction, cap-and-somethingelse systems to address reducing carbon emissions. If you're like me, you glaze over when you hear advocates of one of these strategies begin to push for the adoption of their pet strategy. Is there a difference? Does it matter?
Here's Peter's explanation (from Climate Solutions: A Citizen's Guide):
Three varieties of cap-and-trade
One of the tools described in the previous section--carbon capping--deserves special attention, in part because it has several permutations, and in part because it's likely to be adopted in some form.
Carbon capping comes in three varieties: cap-and-giveaway, cap-and-auction, and cap-and-dividend. All start with descending caps. The differences among them lie in who pays whom, and how leaky the caps are.
In Europe, a carbon cap-and-giveaway program handed billions of Euros in windfall profits to a few large utilities. In the U.S., an MIT study estimated that grandfathering permits to American utilities would give them hundreds of billions of dollars in extra profits every year for several decades--a staggering amount of money that would ultimately flow to their shareholders.
In cap-and-auction, permits are sold to polluters, not given away free. Permit revenue is collected by government rather than private corporations. What government does with the money is then up to public officials. It could be used to speed the climate transition, though there are no guarantees.
In cap-and-dividend, permits are also sold, not given away free. However, the revenue doesn't go to the government--it comes back in the form of equal dividends to all of us who pay it. This revenue recycling system is sometimes referred to as a sky trust.
(Source: Congressional Budget Office, "Trade-Offs in Allocating Allowances for CO2 Emissions," table 1, p. 2, www.cbo.gov)