Cap and...?
Cap and trade is a relatively standard model for curbing greenhouse gas emissions. This mechanism functions by placing a cap on the amount of legal emissions from specified greenhouse gases (GHG) such as carbon dioxide. The right to emit carbon dioxide is granted through the distribution of permits. In some programs, like the EU cap and trade program, permits are given away, but in others the permits are auctioned. The proceeds of such an auction can go to the government for investment in emission reductions, to helping industries adjust to the cap, or be redistributed to citizens. In any cap and trade system the number of permits available will decline as the cap on emissions gets tighter, increasing the price of the permits and, in turn, the cost of emitting.
These permits, also known as allowances, were the center of heated debate over the US House of Representatives’ cap and trade bill (American Clean Energy and Security act or ACES) passed this past June. The bill established a cap at 83% of 2005 carbon emissions levels, or, as it is more commonly described, a 17% reduction from 2005 levels. This goal of 17% reduction would be achieved by 2020, getting more restrictive in future years. ACES allocates allowances in with approximately 80% “giveaway” permits and 20% auctioned permits (the proportion of auctioned permits will increase over time). The corresponding legislation in the Senate, expected by many to be more aggressive than ACES, would likely take a similar strategy in allocating allowances; however, the Senate action has stalled. For climate change legislation the Senate was always expected to be more difficult, but as debates over health care and the economy have gripped congress the road for climate legislation has become more difficult. As the Senate version stagnates, another option has been brought to the table: cap and dividend.
The Carbon Limits and Energy for America's Renewal (CLEAR) Act, also known as the Cantwell-Collins bill (for its authors), focuses on a less common approach to addressing carbon emissions. Cap and dividend would auction 100% of allowances and divide auction proceeds into two portions: 25% to help industry make the transition to clean technology and 75% to households. One of the most common complaints about Waxman-Markey and about traditional cap and trade proposals has been the burden it places on the middle class. A carbon market will inevitably make emitting carbon expensive, as desired. This will also increase costs of manufacturing, costs that will likely be pushed onto the consumer through higher prices. The Cantwell-Collins legislation is projected to return $1,100 to the average US household to compensate for increased prices. Because the bill is capable of neutralizing the impact of carbon pricing on consumers and households it is likely to draw much popular support from both sides of the aisle.
Cap and dividend is not an entirely new concept. In April of 2009 House Representative Van Hollen proposed similar legislation in the House. The idea for cap and dividend is largely modeled off of Alaska’s strategy for redistributing oil revenues (ironically enough). Cap and dividend seems to be a hot topic in the Senate right now and it may actually be the most politically palatable. The bill itself is simple, a mere 50 pages in comparison to the colossal 1,428 page Waxman-Markey legislation from the House. One reason for the bill’s brevity is that it does not allow for carbon offsets. There is large public distrust of offsets because they allow for carbon cuts to be displaced and transferred away from polluting industry. If done correctly offsets can enhance economic growth and decrease greenhouse gas emissions, but that is the problem; they are near impossible to do correctly. The cap and dividend leaves this aspect out, simplifying the process.
With the clear financial appeal for the average US citizen, this bill may actually have the popular support to pass in the senate, but it still has a long road ahead. One particular dilemma is the limited nature of adjustment funding for industry. The Waxman-Markey legislation started with a guarantee of 100% auction, but this quickly dwindled and in the final legislation there were considerable provisions for protecting industry. Perhaps the 25% of auction proceeds dedicated to transitioning industries to a low-carbon economy in the CLEAR act will be sufficient, but it seems likely that negotiations will push toward a more industry sensitive approach. A traditional cap and trade bill can withstand this type of political compromise, a cap and dividend bill, which derives its legitimacy from compensation, cannot. As more people get behind the cap and dividend solution there will likely be some political divides bridged, but we may see new new ones emerge.
Image taken from www.treehugger.com
