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Reducing Emissions: Cap-and-Say What?

There’s been a lot of talk in the media and government about cap-and-trade, cap-and-auction, cap-and-somethingelse systems to address reducing carbon emissions. If you’re like me, you glaze over when you hear advocates of one of these strategies begin to push for the adoption of their pet strategy. Is there a difference? Does it matter?

Well, yes.  There is a difference, and the differences do matter. Luckily, Peter Barnes explains the various systems and the differences between them in his book Climate Solutions: A Citizen’s Guide. Here’s how Peter breaks it down:

Three varieties of cap-and-trade
One of the tools described in the previous section—carbon capping—deserves special attention, in part because it has several permutations, and in part because it’s likely to be adopted in some form.

Carbon capping comes in three varieties: cap-and-giveaway, cap-and-auction, and cap-and-dividend. All start with descending caps. The differences among them lie in who pays whom, and how leaky the caps are.

In cap-and-giveaway, permits are given free to historic polluters. This is called “grandfathering.” The more a company polluted in the past, the more permits it gets in the future—not just once, but year after year. As the descending cap raises the price of fossil fuels, everyone pays more, and the companies that get free permits keep his extra money. Their profits and stock valuations soar, while energy users bear the costs.

In Europe, a carbon cap-and-giveaway program handed billions of Euros in windfall profits to a few large utilities. In the U.S., an MIT study estimated that grandfathering permits to American utilities would give them hundreds of billions of dollars in extra profits every year for several decades—a staggering amount of money that would  ultimately flow to their shareholders.

In cap-and-auction, permits are sold to polluters, not given away free. Permit revenue is collected by government rather than private corporations. What government does with the money is then up to public officials. It could be used to speed the climate transition, though there are no guarantees.

In cap-and-dividend, permits are also sold, not given away free. However, the revenue doesn’t go to the government—it comes back in the form of equal dividends to all of us who pay it. This revenue recycling system is sometimes referred to as a sky trust.

Dividends address the dark side of carbon capping—the fact that rising carbon prices will take money out of everyone’s pockets. According to the Congressional Budget Office, the average U.S. household will pay $1,161 a year in higher energy prices when carbon emissions are reduced 15 percent. As emission reductions increase, so will the cost to households. By recycling higher carbon prices back to households, rebates protect our disposable income while we reduce carbon emissions to safe levels.

(Source: Congressional Budget Office, “Trade-Offs in Allocating Allowances for CO2 Emissions,” table 1, p. 2, www.cbo.gov)


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