The Dernogalizer

April 9, 2009

Cap and Dividend

Filed under: Climate Change — Matt Dernoga @ 4:43 pm
Tags: , , ,

I made a post a couple weeks ago about how House Democrats Waxman and Markey had introduced a comprehensive draft climate bill which had some strengths and weaknesses. That bill’s mechanism for reducing emissions was “cap and trade”.   Another Congressman Chris Van Hollen just introduced a “cap and dividend” bill. Some people are familiar with what cap and trade bill is. This is what most lawmakers in Congress are familiar with. Very few politicians or people have any idea what cap and dividend is. A lot of people probably have no idea what either term means. I’m going to try and give a quick explanation of what both mean, and explain how cap and dividend is different, better, and worse than cap and trade. This website also has a good deal of information on cap and dividend.

So cap and trade is where you place a ceiling on how much carbon can be emitted, and sell “permits” to polluters that each represent a certain quantity of carbon. To give a very bland example….lets say all the coal plants in Maryland emit 100 tons of carbon a year. A cap and trade bill holds the line at 100 tons, and sells permits for each ton of carbon to all the coal companies for a certain price, lets say 1 million dollars a permit. Now we’ve got a pot of money which can be used to invest in cleaner technologies, or give it back to consumers to offset higher electricity prices, or both. The coal companies now have permits to pollute. Next year, the government sells the coal companies 99 permits apiece instead of 100. If you go over the limit of 99, you pay a steep price. We’ve just reduced emissions by 1% assuming the coal plants adhere to the rules, and it’s in their interest to do so even if its a little more expensive. The government gets another pot of money, and can once again decide how much to invest in technology, or how much to give back to people. The “trade” part of cap and trade comes into play too. Lets say one coal company invests in new technology and reduces emissions by more than the 1% required. They don’t need all 99 permits, maybe they need 95. They can sell those extra 4 permits for a profit to dirtier companies so they can pollute. This creates a competitive incentive for companies to try and reduce emissions. It’s almost like an manufactured free market for the right to pollute.

Cap and dividend is much simpler. Instead of regulating the emissions when they are burned, fossil fuels are regulated when they are extracted from the ground. So if I’m a coal company, I pay a certain charge when I take the coal out of the ground. When the permit for extracting that coal is issued, theres a price attached that reflects the price of carbon. This price of these permits are adjusted to make sure carbon emissions are capped, and then there a fewer and fewer permits to extract carbon from the ground each year, so the permits get more expensive. The other difference is that the pot of money we get from the sold permits all goes back to Americans in equal checks each year to ease the crunch of higher energy prices.

So which is better? Well the director of the Chesapeake Climate Action Network Mike Tidwell in the video below thinks cap and dividend is best. I actually favor cap and trade. I think a lot of the money the government gets from the permits should go back to the public, but I don’t think it should be 100% like cap and dividend does. I think some of the money needs to go into investing in substitutes for the fossil fuels we are pricing out of the market. Critics of cap and trade say it can get too confusing and the polluters can take advantage of it by getting free permits, avoiding regulation etc. However, this is only the case if the bill is poorly written or if polluters have a large say in what the bill looks like. A cap and dividend bill could get just as muddled down by skeptical politicians and their polluter allies. Although cap and dividend might be simpler, most people and politicians aren’t familiar with it. It’s already been tough enough getting Congress and the public to wrap their heads around cap and trade. In my opinion it would be hitting the restart button to have to go through all the nuances of a cap and dividend bill. I say we should stick with what our politicians are familiar with and not confuse them.

Ultimately though, it’s not so much whether you do cap and trade, or cap and dividend, or a carbon tax, or something else. What matters is whether the bill has strong targets, makes smart investments with the money it raises, and is enforceable. I would take a strong cap and dividend bill over a weak cap and trade bill, and vice versa. Chris Van Hollen’s cap and dividend bill is narrowly stronger with targets than the cap and trade bill Markey and Waxman introduced, and doesn’t have anything bad attached to it yet like funding for clean coal and carbon offsets. However, I don’t think it has a very good chance of passing, whereas Markey and Waxman’s bill do.

Hopefully this cleared something up. Enjoy the video below in case you want another explanation

1 Comment »

  1. […] the cost of higher electricity prices.  This is actually a method supported by CCAN, called the cap and dividend approach, is considered a very sound one in the environmental community.  The problem that I see […]

    Pingback by Climate Bill Updates « The Dernogalizer — May 20, 2009 @ 11:31 pm | Reply

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