The Search for Workable Climate Legislation: Cap-and-Dividend

Robert N. Stavins, a climate economics expert at Harvard, expressed yesterday his hope for an effective climate bill that can please both sides of the aisle. His solution rests on a system of “upstream” cap-and-trade, in which all carbon allowances are sold to carbon emitters and a large portion is then returned to American households through tax rebates. According to Stavins:

[This] modified version of cap-and-trade that could be much more attractive in this era of rampant expressions of populism, coming both from the right (“no new taxes”) and the left (“bash the corporations”). Such a system – which would have direct and visible positive financial consequences (i.e., rebate checks larger than energy price increases) for 80% of American households – might not only not be difficult for politicians to support, but it might actually be difficult for politicians to oppose!

This concept most closely resembles the “Carbon Limits and Energy for America’s Renewal (CLEAR) Act,” sponsored by Senators Maria Cantwell (D-Washington) and Susan Collins (R-Maine). The bill, introduced in December, would create a “cap and dividend” system to defray higher energy costs to the consumer.

But some changes need to be made for this proposal to be effective, according to Stavins. For one, the current bill allows only producers and importers of fossil fuels to buy the carbon allowances, which necessarily restricts the market. “Furthermore, the Senators’ proposal says that holders of carbon allowances are actually prohibited from creating, selling, purchasing, or trading carbon derivatives, thereby tremendously reducing the efficiency of the market and needlessly driving up costs.”

Nevertheless, the concept of “upstream cap-and-trade” has a lot of promise, according to a PEW Center on GLobal Climate Change study:

An economy-wide upstream cap-and-trade program would be environmentally effective, could attain least-cost compliance if it incorporates flexibility measures, and would be administratively feasible.

There are substantial theoretical benefits from such an approach. The near-term environmental outcome is clear, assuming that the government will maintain the emission limits in the face of possibly significant price uncertainty and volatility. Current analysis indicates that it would minimize economic costs to the economy, be manageable administratively, avoid overcompensating existing emitters, and perhaps capture some offsetting benefits from reduction of distortionary taxes.

By Mary Tharin

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2 Comments

Filed under Economy, Environment

2 responses to “The Search for Workable Climate Legislation: Cap-and-Dividend

  1. An upstream cap or charge on carbon supply (presumably with a credit for any carbon captured when the fuel is burnt) is far easier to implement than a cap at the point of emission. Giving the revenue to the people is much better than giving free allowances to polluters or allowing dubious offsets in uncapped areas. But the proposal is still not good enough to work as an international scheme and nothing else will stop global warming.

    To work globally there needs to be agreement either about how to share the limited allowable carbon emissions between sovereign nations or about how to share the trillions of revenue from an international auction of allowances. Neither seems likely to happen any time soon if ever.

    I have a simple, effective and popular solution.

    In a recent Times Online live debate see
    http://timesonline.typepad.com/science/2009/12/live-debate-after-copenhagen-where-to-now-for-the-climate-debate.html
    85% voted that “Fossil fuel companies should be obliged to sequester an increasing fraction of the carbon content of the products they sell to avoid dangerous climate change”. For details on why this proposal would be easier for all countries to agree to than cap and trade or carbon tax, how it would drive energy saving, renewables and nuclear, how it would be implemented and how it would stop global warming see my website at http://jemsavestheplanet.blogspot.com/

    When fuel producers are obliged to place contracts for carbon capture and sequestration for a proportion of the carbon in their fuel, as I propose, I think there will be power companies from around the world competing to take their money. I hope we will be left wondering what all the fuss around cutting emissions was about.

  2. Good posting, I bookmarked your blog post so I can visit again in the future, Thanks

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