If you tried to dump harmful waste on the property next door, your neighbor would either stop you or require you to pay a fee. But if you dump carbon dioxide into the air, no one charges you a penny because no one, as yet, owns the air. This free ride results in what economists call a market failure. The actual costs of polluting the atmosphere are enormous, but polluters don’t pay them. Instead future generations are stuck with the tab.
A carbon tax, or a carbon cap-and-trade system, can fix this market failure, but because American politicians are loath to impose taxes, a cap is far more likely. Under a cap, government sets a limit on total carbon emissions and issues tradable permits up to the limit. Each year the number of permits declines, reducing emissions over time. Permits can be issued to companies that emit carbon dioxide or to those that supply it for burning—oil, coal and natural gas firms. Issuing permits to suppliers is easier to administer because no smokestacks need to be monitored.
Cap and trade may sound simple, but it’s not. A trillion-dollar question lurks below the surface: Who will own the air? Capping emissions makes carbon scarcer and lets private companies raise the carbon price, which companies will likely pass on to consumers. But who ultimately gets the extra money depends on who has the initial rights to the air. It might seem self-evident that the air belongs to everyone, but when capping was first proposed, the assumption was that polluting companies would be given permits for free. Europe, which operates the world’s leading cap-and-trade system, did just that. Not surprisingly, this led to higher prices for consumers and profits for polluters.
Seeing this, several U.S. states that wanted to cap carbon dioxide decided to auction permits rather than handing them to companies for free. In this approach the auction revenue goes to government, which ostensibly uses it to improve air quality. But consumers still pay higher prices, and many families are hit hard. According to the Congressional Budget Office, the average American family would pay $1,160 in higher prices if carbon emissions had to be cut 15 percent. And that burden would get heavier as the cap got tighter.
Dividends Instead
To offset the load placed on consumers, a third form of carbon capping, known as cap and dividend, has gained support. Under this plan, permits are auctioned, but the revenues do not go to the government; they go back to citizens in the form of dividends, distributed equally among everyone, perhaps even wired directly to people’s bank accounts or debit cards. The plan is modeled after the Alaska Permanent Fund, which pays equal dividends to Alaskan residents from the proceeds generated from state oil leases.
In essence, cap and dividend treats the air as a managed commons in which everyone owns a share. Liberals such as former secretary of labor Robert Reich and conservatives such as Senator Bob Corker of Tennessee support the approach, as do a growing number of climate scientists and economists. Some U.S. states as well as other countries are also considering the idea.
As in other forms of capping, carbon emissions prices will rise as the cap declines, spurring private capital to flow into clean alternatives such as wind and solar power. The crucial difference is that the dividends should rise along with the carbon prices, easing the impact on consumers.
This approach also relieves pressure on politicians who want to do something about global warming but don’t want to impose burdens on the public, a key consideration at a time when high fuel prices and the economy are explosive issues. And the system is simple to understand and administer.
Cap and dividend has another advantage: it creates a virtuous circle, in which how people fare depends on what they do. The more carbon any company or individual burns (directly or indirectly), the more that company or individual pays. Because everybody gets the same amount back, people gain if they conserve and lose if they guzzle. This is fair to all, and the poor come out ahead because they burn less carbon than other people do. Because the transition to a far more carbon-free economy will be long and difficult, it is vital to operate a system in which everyone has a chance to win. Otherwise people will get angry, and political support will crumble.
See what we're tweeting about
13 Comments
Add CommentWouldn't this encourage citizen's to use more fossil fuels in order to boost their dividends?
Reply | Report Abuse | Link to thisPeter Barnes' "Cap and dividend" represents a clear improvement on the idea of "cap and trade". Better yet would be to totally eliminate the corporate income tax and replace it with a corporate carbon tax levied on the first users of fossil fuels (importers, refiners, pipelines, coal-based utilities) on a dollar for dollar basis.
Reply | Report Abuse | Link to thisAs we all learned in Economics class, corporations do not pay taxes, consumers and workers do. Corporations merely act as collection agents and pass any tax "cost" on down the line.
A corporate carbon tax would be much simpler to collect than auctioning and monitoring a "cap-based" system. It would free up a huge number of smart people at the IRS and in corporations to actually do something productive. It would help our international competitiveness, especially in "clean industires". It would stop penalizing companies from doing what we want them to do: namely be creative and efficient and make a profit. And would penalize them for doing what we don't want them to do: contribute to carbon emmissions and a lack of energy independence.
Finally, a corporate carbon tax would be more progressive than the current corporate income tax, as energy intensive goods and services are disproportionately consumed by the rich (think air-travel) while corporations that now pay the greatest share of income taxes make things or services that cater to the less well off. (think Wal-Mart, P&G, drug companies).
With the Corporate income tax eliminated and replaced by an equal corporate carbon tax, and the economy adjusted to that change, then, if we wanted to go a step higher on the corporate carbon tax rate, dividending the extra tax back to each valid holder of a Social Security card might be good next step.
FS Johnson
Cincinnati, OH
FS Johnson/gringo cuadrado - It sounds great from a high level but as someone from your same region I'd have to caution you that our electric comes from 98% from coal. This system in it's simplest form would not support our lower income neighboors to the same level that the higher costs would take away from them.
Reply | Report Abuse | Link to thisConsidering that wind is not a local viable option, solar is challeged, the east cost will have large geothermal before we do and we have an aversion to nuclear we will struggle when any change comes.
While we will have to pay more than the rest of the nation to change there has to be some method that allows us to suceed and not just close down the region.
Pure Cap and dividend could be the ultimate objective. In the mean time funding needs to be directed towards:
1) helping the less advantaged in carbon high regions adapt
2) supporting a national grid
3) supporting alternatives nationally (so that we may import energy from those regions via the national grid)
4) supporting some capture or replacement in carbon high regions
We may be able to move forward without special support if the cap is set to the limit of what algea can capture from coal (less than 40%) and given 5 to 10 years to get there. In that time it would be more clear what direction we can go to get beyond that limit such as direct import from other regions.
Be careful what you wish for. Our region hangs in the balance.
I tried to figure out how to sell carbon credits. I have a bunch of land with nothing but trees on it. Apparently you can just sell credits regardless of anything there is nothing in place to a sure you even have the means to sell credits. The only trading place for small business (as in less then a million acres), were places that were clearly meant to profit the creator of the market place by charging "listing" fees. If you want to sell you just have to market them and find a buyer on you own. All that creates is deals for giant companies and their "friends". There is no real and meaningful marketplace for credits. Just another way for large business to make money and others to shirk responsibility.
Reply | Report Abuse | Link to thisCredits are seperate from emission caps. You have have a credit system in cap system. The problem is monitoring the credits. Howe do you seperate honest forest owners from the dishonest without an expensive checking system?
Reply | Report Abuse | Link to thisIf you cap dividends, shareholders will be forced to reinvest the surplus capital in the same company. If the compnany is coal, the circle will be very vicious.
Reply | Report Abuse | Link to thisNO, because the more fuel a citizen uses, the more they have to pay as a tax, and that tax gets spread across the whole poulation, diluting their portion back. Someone that uses less fuel pays less, but recieves the same amount back as everyone. You dont get back what you spend, but rather you spend an amount, and get the same as everybody back, making your magin better if you conserve.
Reply | Report Abuse | Link to thisThe first line of this article shows why these sort of proposals are nonsense. What person in their right mind would allow someone to dump harmful waste on their property for a fee? What good is money when you are sick or dying? But this is exactly what these proposals are giving polluters the right to do: harm others as long as they pay out a few dollars.
Reply | Report Abuse | Link to thisThis is just a bunch of financial hocus-pocus, the same sort of thing which caused our current financial problems. What we have to do is cut the output of pollutants, not play the sort of games which only benefit the insiders who know where the rigmarole is sending the money.
I have a lot of acres of trees also and would like to fund our restoration forestry model, since it sequesters up to 3x the carbon compared to FSC standards. We have a high traffic website www.foreverredwood.com if you need a place to sell your credits. Contact me at warren@broadlink.com
Reply | Report Abuse | Link to thisThis proposal is ridiculous. It is simply another tax on everyone, nothing more, nothing less. It ridistributes wealth just under a different name. It will not reduce pollution anymore than any other proposal as companies will just jack up the prices to where they continue to profit, or brownouts become more common as the companies produce less power. The worst part is that the end result will be yet another bureaucracy sucking money off the top and most likely inefficiently distributing the wealth.
Reply | Report Abuse | Link to thisIt seems that the State of Alaska has a 'cap and dividend' type of system already in place, though I don't know the details of the difference between it and the one proposed by the legislation introduced by Congressman Chris Van Hollan (Maryland). Alaska provides an annual dividend (called the Alask Permanent Fund) to each citizen of the State, and it is a very popular process. Can someone describe, in simple terms, the differences between these systems functionally, economically and environmentally?
Reply | Report Abuse | Link to thisRather than Cap and Trade style solutions or Carbon Tax,
Reply | Report Abuse | Link to thisit would be enough to monitor emissions resulting of changes just in electricity and transport.
A local focus on these 2 sectors alone (80% of CO2 emissions),
with advantages to all regardless of any CO2 issue,
would happen to give the currently targeted 2020/2030 reductions anyway
http://www.ceolas.net/#cc1x
If specific emission legislation was needed,
it could be by EPA phase in limits on CO2, as is aleady being done with say power plant mercury emissions
(Cap without Trade)
Unfortunately,
as with the US Congress,
the current Copenhagen talk is also of emission trading,
extending the Kyoto trading scheme.
The problem with emission trading is particularly in the short term,
that everyone now considers so important,
since any squeeze on allowance permits takes years to kick in, all the more so with the free allowance handouts and offset schemes.
The "No Goldilocks Solution",
as seen in the EU where the problem with carbon prices is they
are either too low and so cheap and meaningless as in recession times,
or too high to lead to any reduction at other times, when evasive
action for example involves paying off third world emitters (who
according to a recent Economist article can simply be set up to rake in cash ie they would not be emitting otherwise), or tree planting exercises of dubious effect, which may in any case be fast growing
non-native trees which changes local ecosystems.
An artificial market will always be an artificial market.
_______________
Understanding Emission Trading (Cap and Trade) - and why it doesn't work
http://ceolas.net/#cce5x
Basic Idea
Offsets -- Tree Planting -- Manufacture Shift -- Fair Trading
Allowances: Auctions + Hand-Outs -- Allowance Trading
Companies: Business Stability + Cost
In Conclusion
The system would not encourage people to use more fossil fuels in order to boost their divided, as the usage permit requires an auction, the proceeds are shared among the population. It doesn't make financial sense to spend money on a permit to receive a tiny portion of that permit fee in return.
Reply | Report Abuse | Link to thisThis is an extremely good proposal as the auctions for permits are public and the monies raised go directly to the population. There is therefore less political interference in the process.
As the example of the Alaskan Permanent Fund shows, using natural resources as a means of raising public and common wealth is extremely useful and economically useful (no loss in trades, no deadweight loss etc). This is something well known since Thomas Paine (see Agrarian Justice) and supported by most economists - but you have to dig a bit!