It is a rare occurrence when government can help the environment and, at the same time, receive tens of millions of dollars for tax relief. New York leaders now have that opportunity, thanks to the Environmental Protection Agency's decision to use cap-and-trade regulation to control mercury and nitrogen oxides. Albany could take advantage of the opportunity, or hand as much as $64 million a year to deep-pocketed political interests.

Under cap-and-trade, the government establishes a limit on the total amount of a pollutant that can be released, and then distributes permits to firms that allow the release of specific units of the pollutant. Taken together, the permits allow no more emissions than the government-established limit, but the firms are free to trade the permits between themselves as they see fit. Until now, cap-and-trade programs have mainly been used on the national level.

Now, under two new programs, the EPA will direct New York and several other states to distribute a limited number of annual permits for the emission of specific amounts of pollutants like nitrogen oxides and mercury. Many of the states will simply give the permits to firms that have high emissions levels--and perhaps heavy political influence. But the Empire State could opt to auction them off. Money raised from the sale could then be used to lower state taxes.

The only difference between auctioning permits and giving them away is who gets the revenues--the state or the beneficiaries of the giveaway.

The EPA has already established New York's nitrogen oxides and mercury caps, so those costs cannot be changed; the state's only option is how to distribute the permits.

If New York were to auction all of the permits, economic projections suggest the nitrogen oxides sale would earn the state $55 million in the year 2010, and an additional $9 million for mercury. Together, that represents $64 million in 2010 that could be used to lower taxes.

In both the nitrogen oxide and mercury rules, the EPA is correctly leaving permit allocation decisions to the states. Albany should take advantage of this opportunity and use permit auctions as a means of raising revenue to reduce economically harmful tax rates.

Ted Gayer is a visiting scholar at AEI and an associate professor of public policy at Georgetown University.