What is the difference between an auction-based cap and trade system and an allocation-based system?
There are two ways in which allowances under a cap and trade program can be distributed: they can be auctioned off or assigned for free to certain entities. A combination of both methods is also a possibility. In an auction system, the government must design an auction and allocate the proceeds. In an allocation system the government must decide who receives allowances and how many they receive. The process of determining which cap and trade system to use is not a substantial factor in a program’s success. It is an important step, but one that does not affect the ability of a program to promote human health and environmental benefits. It is the emission cap and banking that determine the amount of reductions a program can achieve.
