Senators John Kerry (D-MA) and Joe Lieberman (I-CT) introduced a climate bill yesterday that, among other things, establishes a cap-and-trade program for greenhouse gases.  The virtue of a cap-and-trade program is that it establishes a market price for a pollutant and allows flexibility within and across regulated entities in how to reduce emissions.  But any cap-and-trade program must decide whether to allocate the pollution allowances for free or through a government auction, as well as how to distribute both the allowances and any auction revenue.

As I wrote previously for TPC’s “Desperately Seeking Revenue” event, a full auction of allowances, which in turn uses the revenues to reduce high marginal tax rates or reduce deficits, lowers the overall cost of any cap-and-trade program.  In this link, I show how the Senate bill distributes the allowances.  Unfortunately, the measure gives away most for free and devotes very little revenue to reducing either high marginal tax rates or deficits.