Why Revenues from Cap-and-Trade Should Be Returned to Us As Dividends

Here's the original of a piece I sent to the Wall Street Journal, at their request(as you see, a more detailed version of my posting last week). Their published version left out two pertinent things, however, that, for the record, need to be included: the important feature of having the "dividend" checks paid monthly, just like Social Security checks are paid. And also Peter Barnes' important role pushing for this concept.

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The Lieberman-Warner cap-and-trade bill is going nowhere. Even in the unlikely event Congress passes it, the President has said he will veto the measure, and there aren't nearly enough votes to override. So the real action commences January 20, 2009, when a new administration takes over. BarackObama is on record in favor of cap and trade. And so, significantly, is John McCain.

In fact, McCain has been among the strongest backers of the Lieberman-Warner bill, and the bill offers a good indication of where McCain will head He’s been pushing for a bill much like Lieberman’s for some time now, twice bringing it to a vote. In October last year, McCain said he was “bitterly disappointed” by US inaction on climate change so far. “The Europeans implemented a cap-and-trade system; they stumbled and had their problems but it is still the right thing to do,” he said. More
recently, McCain spoke of "the central facts of rising temperatures, rising waters and all the endless troubles that global warming will bring." Lieberman is, of course, a key McCain backer.

So it's a certainty that we'll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions, which will drop annually. The "trade" part of the equation would allow companies finding efficient ways to cut emissions to sell the unused portions of their permits to others. Obama’s proposal is more ambitious than McCain’s in terms of how fast the overall cap would drop.

But the biggest difference between McCain and Obama is how the permits would be allocated. McCain’s proposal would initially give out most of them for free to the nation’s biggest emitters of greenhouse gases. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters will face the largest challenges in cutting emissions.

By contrast, Senator Obama has proposed allocating the permits through an auction. Under his proposal, every company - large or small - would have to buy the rights to emit greenhouse gases. As a result, the biggest emitters would have to pay the most - thereby providing them with the greatest incentive to cut emissions right from the start. In economic terms, such a carbon auction is the equivalent of a carbon tax, and it make more sense than a system that allocates permits on the basis of how much greenhouse gas a company or industry already emits. Companies and industries that impose the largest social costs in terms of such emissions should be given the greatest incentives to cut costs right from the start.

Moreover, carbon auctions invite far less political maneuvering. Setting initial allocations by emissions, as McCain wants to do, invites every big corporation and industry to fight for the biggest possible allocation and claim the largest emissions. Despite John McCain’s avowed determination to reduce the influence of lobbyists in Washington, the resulting free-for-all would be a bonanza for K Street. And there’s no reason to suppose the outcomewould bear any resemblance to the public interest. In fact, one likely result would be the issuance ofso many permits as tobreak the overall cap. This is one reason whycap-and-trade hasn't worked very well in Europe so far. Since the EuropeanUnion adopted the system three years ago, carbon emissions are actually up by several percentage points. The EU gave initial permits away for free, and many companies discovered clever ways to grab even more of them than their previous emissions would warrant.

McCain hasn’t completely ruled out a carbon auction. Lieberman’s bill would auction off some permits – at first a few, and more as time goes on. Over the life of the bill, half of the permits would be handed out for free, half by auction. It seems likely that McCain, who supports the Lieberman bill, would follow the same model.

But carbon auctions raise another problem when it comes to Washington. Revenues from the auctions are likely to be fish bait to industries that might qualify for some of them. Lieberman estimates that the market value of all permits under his bill would be about $7 trillion by 2050. That sum would go into what Lieberman calls a Climate Change Credit Corporation, which, operating outside the budget process, would invest in various plans for developing alternative energy. You can bet that lobbyists for ethanol, nuclear, and so-called “clean” coal are already salivating at the prospect of a similar fund emerging from a bill sponsored by McCain or Obama.


That's why it's important that all revenues from carbon auctions be cycled back to citizens. And rather than launch another endless debate over how and to whom – a payroll tax cut for people earning under the median wage? a cut in capital gains? – it would be well to agree to the simplest possible formula: Every adult citizen should receive an equal share. If the carbon auction yields $150 billion in the first year, for example, each of America’s 150 million adult citizens should receive a Treasury check of $1000.

Such direct and simple repayments – what analyst Peter Barnes, who has been pushing this idea, wisely calls “dividends” – deal with another problem. Although the balance of economic studies suggest that the cost of a cap and trade system will be
modest, particularly to the extent it induces companies to reduce their emissions, inevitably some costs will be involved and be passed along to consumers. The cost of doing nothing about climate change will be far higher. But consumers Who are already walloped by high fuel and food costs will be in no mood to accept even modest additional price increases. Hence, the yearly dividend checks will be a welcome offset.

And to make the dividend checks really useful to people, they should be paid out on a monthly basis, the same as Social Security checks. Moreover, that way citizens can be continuously reminded of what they're giving away, and what they're getting back for it.

Our atmosphere belongs to all of us. It seems only reasonable that corporations should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn't the same principle apply when industries use the biggest common resource of all?