Cap and Dividend - Latest theory on carbon cap policy.

I recently read Peter Barnes' book on carbon cap policy, and I wanted to write a cummulative piece on various carbon cap policies and why I think his choice is one of the best.

Why place a cap on carbon?
Placing a cap on carbon emissions will encourage carbon reduction in both the economy and in the atmosphere. The plan is for government to issue a number of permits for carbon producers in the United States. Every year, the government will reduce the amount of carbon emission permits. The reduced number of permits will make carbon more expensive and will thus increase the cost of carbon, and ultimately make it harder and harder for polluters to continue sustaining and growing their production of carbon. They will have no option but to invest in clean technologies, since there simply will not be a way for them to produce energy without complying with the new legislation. Any producer that goes over their limit will have to pay a high penalty tax, ensuring that the system is fair.

If we offer permits to historical producers for free, the coal/fossil fuel companies will in turn pass on the costs to the customers (the public) so the system will most likely hurt the poor and the middle class the most and will create a profit for the coal/fossil fuel companies. The oil/fossil fuel companies will reap profits, thus benefiting only the shareholders. However, the system of cap and trade is complex. Peter Barnes visits the different carbon cap policies.

Carbon Cap Policies – The Dilemma
The future generations will have to pay for the costs of dumping carbon into the atmosphere. The people who dump the carbon into the atmosphere, and the people that use the carbon are not charged for it. This system is unfair, and must be remedied by carbon cap policies.
High carbon prices are good for the atmosphere but reduces household incomes, and can hurt the poor the most. Because of this contradiction, we must set up a policy that will encourage renewable energy production and less carbon production while at the same time protecting household incomes. The poor and the middle class cannot suffer at the expense of the rich. In fact, most of the upper class and rich in this country are the ones who are consuming to most amount of energy.

According to http://www.capanddividend.org/?q=readfirst and http://www.onthecommons.org/content.php?id=2240
Carbon caps can work in two different ways 1) (downstream cap) where carbon enters the atmosphere through emitters, and (2) (upstream cap) where carbon enters the economy in the form of a fossil fuel through suppliers.
Carbon is too large a pollutant to cap by way of emitters. Therefore, we must cap according to suppliers. This is an easier system to administer because the cap would apply to a few hundred oil/fossil fuel companies.
A descending carbon cap will encourage utilities to invest in renewable energy, and less carbon producing plants. The automakers will encourage the creation of hybrid cars. Government will have to issue new policies in clean technology, smart grid and transmission systems, investment in mass transit, efficiency standards for transportation systems, rising renewable energy requirements. The government must also make it a priority to assist workers in the transition economy and offer green collar training.

What is the difference between the following carbon cap policies:
1. Cap and Grandfather or “Cap and Giveaway”
This policy would give the polluters hundreds of billions of dollars for many decades. Instead of selling or auctioning the permits, the government will issue free permits for historical polluters. Even in the present moment, coal companies are trying to build their plants as fast as possible so that they will be “grandfathered” into the system. As carbon caps keep decreasing every year, the consumers keep paying more for energy usage. The free permits will give these historical polluters (oil/fossil fuel companies) extra money as the permit value keeps increasing.
2. Cap and Auction
Permits are sold to polluters and the money is collected by the government. The government can use this money however it likes. The hope is that the government would redistribute this money in public programs that offer climate and environmental solutions, but there is no set guarantee. This will be a hard program to administer given the complexities and differences between different political parties. The money that is distributed to the government may be used in various ways.
3. Cap and Dividend or “Cap and Refund”
Permits are sold to polluters, and the money from these permits gets redistributed to all the citizens on a per capita basis. This is also known as a sky trust. The money will be put into a non profit trust fund and will ultimately be redistributed as equal dividends which will be deposited into accounts or sent as a check. This system is the most fair system for carbon cap policies. In other words everyone pays according to how much they burn and gets back what they save. If the price of energy goes up and you use a lot of energy, you may not gain as much as say, a poor person who hardly uses energy for their homes and cars. For the lower income households, the dividends would exceed what they pay in higher energy prices. Because of this, the poor will see a lot of returns. Since the poor have less money, the amount of money returned back to them will be a larger percentage of their disposable incomes.
According to some studies, the bottom 40% of households would come out ahead, the middle 20% would break even, and the top 40% of households would have a loss.
(An example of this system is the Alaska Permanent Fund, which for 25 years has paid equal dividends from state oil to every Alaskan resident.)

What is wrong with the Cap and Grandfather system:
European Union set up a carbon capping system that failed. Their system was a straight cap and trade system – “cap and giveaway” which gave away permits for free to the historically dirty polluters. Many polluters have reaped record profits which will only make shareholders more profitable and no one else.
What happened -->
1. Issued only to the largest polluters and not all polluters - so less than half of the carbon in the economy was calculated in
2. The bigger companies used political influence and lobbyist groups to force their politicians to give away more permits than necessary
3. All the energy companies who received free permits raised their prices and kept the profits for themselves
4. Carbon offsets from other parts of the world outside of the European Union are acceptable in establishing carbon count. In other words, companies do not have to lower their individual amounts of carbon. Offsets should not be counted against permits.
Policies looked at now
Many US senators are asking for a similar cap and giveaway systems. There have been several policies that encourage free permits for historic polluters. Other policies offer carbon cap downstream policies instead of upstream, which will contradict the effectiveness of limiting carbon in the long run. The point of the policy is to make carbon expensive enough so that companies will be forced to develop alternative solutions to energy. The Bush administration did not favor many climate change or climate protection policies. Obama however, is in favor of the cap and dividend policy. In initial talks, he said that he thinks the government should keep 15% of the profits for public programs while the rest of the dividends are returned to the public.

Current Legislation according to Peter Barnes:
Lieberman-Warner
2020 goal: 10 percent below 2005 level
2050 goal: 70 percent below 2005 level
Initial permit allocation: 76 percent given away free, 24 percent auctioned
offsets: yes
safety valve: Administered by a Fed-like board
other feature: Most auction revenue goes to fossil fuel companies for research
Bingaman-Specter
2020 goal: 2006 level
2050 goal: Contingent on other countries’ efforts
Initial permit allocation: 76 percent given away free, 24
percent auctioned
offsets: yes
safety valve: starts at $12 a ton
other feature: Most auction revenue goes to fossil fuel companies for research
Sanders-Boxer
2020 goal: 1990 level
2050 goal: 80 percent below 1990 level
Initial permit allocation: Authorizes, but doesn’t require, EPA to set a declining cap, auction permits, and distribute proceeds to individuals, communities, and companies
offsets: not covered
safety valve: trigger price linked to a technology index
other feature: Higher auto and electricity efficiency standards

www.onthecommons.org

Why the Cap and Dividend system works the best
Cap and Dividend is the best policy because everyone pays more for burning the carbon and it also pays the consumers as carbon increases. This type of carbon cap is called an “upstream cap” where the permits on carbon would be reduced every year, thus limiting the amount of carbon in the atmosphere. which will cause the price of energy to increase. These windfall profits are redistributed back to the public. The dividends will be redistributed to the households based on how much energy each household uses. The poor benefits the most because they pollute the least. (Table on page 72 of the book “Climate Solutions”). So depending on how much energy you use in your household, you can either gain a lot or lose a lot. The poor would benefit the most from this program.
The “not for profit” trust that administers the dividend returns can be run by a government agency and can ensure that the system is working efficiently.

What could go wrong / What policies can damage the system
1. Safety valves – When the government has pressure to issue more permits for carbon in future years. Oil companies may influence the market in this way if the amount of permits runs out and they are left with no alternative but to reduce production or shut down.
2. Competition Abroad - US will be at a competitive disadvantage if other countries have less expensive goods, must issue import carbon tax on goods from other parts of the world his will protect domestic manufacturers
3. Offsets are not a viable alternative. Offsets are certificates that claim to remove carbon from the air. The government does not play a part in approving these certificates so there is no standard certificate process. Buying offsets from other regions will not encourage a decrease in carbon production within a country’s economy.
4. States cannot preempt the standard federal policy. There must be a unified federal policy that all states have to follow.


Conclusion

How this carbon cap policy must work:
1. Permits must be auctioned in the economy
2. Carbon cap is lowered by 60% by 2050
3. Clean energy becomes competitive
4. You get an equal share of the permit funds
5. No offsets / No safety valves
6. Protect businesses with carbon border fees

My personal reaction to this idea is that it definitely is the most “fair” carbon cap policy. However, if the money is redistributed back to the people, then there will be no money left to invest in the new alternative energy/renewable energy field. There is no room left for innovation and capital to invest in new businesses in clean tech. I think the best idea is one that is similar to Obama’s: create a hybrid of the cap and auction and the cap and dividend policy. Let the people get 85% of the money and the remainder 15% returns to the government for investments in sustainable development innovation.

Further research: Article in Forbes: http://www.forbes.com/business/forbes/2008/1124/146.html