Greg Mankiw writes:

A key question in the design of the system is how those carbon allowances are allocated. Are they given out for free to power companies and other established carbon emitters? Or are they sold at auction so the revenue can be used to reduce government debt, fund public programs, or reduce distortionary taxation? If the allowances are sold, their price resembles a Pigovian tax, which readers of this blog will recognize as the optimal policy response.

I beg to differ. As the Coase Theorem suggests, the method of initial allocation of the carbon allowances should make little difference to the real economic outcome. Even if the allowances are given out for free, they immediately would command a price on the carbon allowance market, and thus any firm that used its carbon allowance would incur a current opportunity cost for doing so. The incentive to reduce the firm's use of carbon would be in place -- just like a Pigouvian tax.

If you gave me the choice, I'd rather give the damned things away because if the government sells off the allowances (or uses Mankiw's Pigouvian tax instead) it will only feed the rent seekers in Washington. Does he really think the new revenue would be used to pay down the debt or reduce distortionary taxes or even fund (useful) government programs? As John Stossel would say: Gimme a break!