could be used to fund low-carbon investment, and also fund cuts in distortionary taxes. Auctioning permits can therefore be more efficient and equitable than allocating permits (Hepburn, 2006, pp. 236–237). Ross Garnaut stated that full auctioning will provide greater transparency and accountability and lower implementation and transaction costs as governments retain control over the permit revenue. Recycling of revenue from permit auctions could offset a significant proportion of the economy-wide social costs of a cap and trade scheme. As well as reducing tax distortions, Kerr and Cramton (1998) note that auctions of units are more flexible in distributing costs, they provide more incentives for innovation, and they lessen the political arguments over the allocation of economic rents. Lobbying for free allocation According to Hepburn (2006, pp. 238–239), "it should be expected that industry will lobby furiously against any auctioning". Hepburn et al. (2006) state that it is an empirical fact that while businesses tend to oppose auctioning of emissions permits, economists almost uniformly recommend auctioning permits. Garnaut notes that the complexity of free allocation, and the large amounts of money involved, encourage non-productive rent-seeking behaviour and lobbying of governments, activities that dissipate economic value. Coase model Coase (1960) argued that social costs could be accounted for by negotiating property rights according to a particular objective. Coase's model assumes perfectly operating markets and equal bargaining power among those arguing for property rights. In Coase's model, efficiency, i.e., achieving a given reduction in emissions at lowest cost, is promoted by the market system. This can also be looked at from the perspective of having the greatest flexibility to reduce emissions. Flexibility is desirable because the marginal costs, that is to say, the incremental costs of reducing emissions, varies among countries. Emissions trading allows emission reductions to be first made in locations where the marginal costs of abatement are lowest (Bashmakov et al., 2001). Over time, efficiency can also be promoted by allowing "banking" of permits (Goldemberg et al., 1996, p. 30). This allows polluters to reduce emissions at a time when it is most efficient to do so. Equity One of the advantages of Coase's model is that it suggests that fairness (equity) can be addressed in the distribution of property rights, and that regardless of how these property rights are assigned, the market will produce the most efficient outcome. In reality, according to the held view, markets are not perfect, and