US interest groups prefer emission trading: A new perspective

If there is to be environmental regulation, what kind of regulation would t he main interest groups then prefer? This political distortion must be take n into account when designing future environmental regulation such as CO2 r egulation. The three main interest groups in the U.S. (private business, en vironmentalist groups and the electricity sector) prefer a grandfathered pe rmit market. Business is attracted by this solution because free initial di stribution of permits both favours existing sources financially and, furthe rmore, creates a barrier to entry for new firms. Environmentalist groups ha ve changed attitudes and promote the idea too as a way of negotiating highe r target reduction levels with industry to maintain voluntary contributions from their members. Finally, electric utilities prefer a grandfathered per mit 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 su ggested that a grandfathered permit market is a more effective policy than a tax in relation to organized interests such as industry, electric utiliti es and environmental organizations. In perspective, the grandfathered permi t 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 ho useholds and the transport sector, because their lobbying power is weak.