Cap and Dividend?
I got an email today about a campaign I hadn’t previously heard of pushing what they call a “cap and dividend” approach to climate change. The basic idea is for a cap-and-trade system with 100 percent of the carbon permits auctioned and 100 percent of the auction revenue rebated to the public on a flat per capita basis. In essence, everyone with a larger-than-average carbon footprint would be subsidizing everyone with a smaller-than-average footprint. This idea has a lot of merit to it in my view, including the fact that it’s simple to explain what the plan is and also pretty simple to explain why it won’t have a devastating impact on your family. Another virtue is that it should be progressive in distributional terms. The main problem on the merits that I can think of is that this would probably have widely disparate regional impact in a somewhat unfortunate way.
Somewhat more interesting is that there’s about no chance of this happening. In theory, this is the kind of solution to climate change that conservatives should be pushing for — skeptical of government planning and peddling, it’s a simple, pure, pristine econ 101 approach. And from an ideological point of view, there should be no kind of regulation that’s less controversial than regulation of air pollution — since the air crosses all property boundaries, it’s the kind of regulation that’s least susceptible to arguments about the illegitimacy of restrictions on property rights. But not only do most conservative institutions and politicians not embrace something like the “cap and dividend” vision, as best I can tell none of them do. It’s a very clear signpost of the essentially corrupt and malign nature of the conservative movement.
34 Responses to “Cap and Dividend?”
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August 21st, 2008 at 2:38 pm
Hi Matt,
The whole conservative movement is corrupt and malign? That seems a bit rich, though I’m sure not waiting in line to defend its virginal purity.
It is patently obvious, I think, that any self-described conservative who doesn’t hold environmental stewardship as a fundamental political value should be called out for false advertising.
Take care,
MB
August 21st, 2008 at 2:39 pm
The second part of this idea (returning the proceeds per capita) has been suggested for many similar measures, such as gasoline or carbon taxes.
And I agree the “beat the average, and you come out ahead” structure is a good selling point–particularly when you consider that studies show more than half of people tend to think they are better than average when it comes to various issues.
August 21st, 2008 at 2:45 pm
In theory, this is the kind of solution to climate change that conservatives should be pushing for — skeptical of government planning and peddling, it’s a simple, pure, pristine econ 101 approach.
The auctioning of permits is, yes. The “dividend” part is just a pure wealth redistribution. Why would conservatives ever favor that? It has nothing to do with being corrupt or malign.
August 21st, 2008 at 2:59 pm
right Says:
August 21st, 2008 at 2:45 pm
The auctioning of permits is, yes. The “dividend” part is just a pure wealth redistribution. Why would conservatives ever favor that? It has nothing to do with being corrupt or malign.
Not if you look at it from the point of view that we each own an equal portion of the air/climate and the amount of pollution we may emit and view this as a way for people to sell their shares to others.
August 21st, 2008 at 3:00 pm
Ah yes, because conservatives don’t favor restricting energy production and massive redistribution of wealth, this proves the corrupt and malign nature of the conservative movement. Golly, I can’t see why anyone would fail to support that!
The real problem with this plan is that once the auction funds are in the hands of the government, democrats would never allow it to be returned to the people. The government knows best how to spend it after all.
August 21st, 2008 at 3:05 pm
I agree that cap-and-dividend is kind of awesome, but you’ve missed the best part! What’s great about cap-and-dividend is its potential for cementing popular support for the program against the inevitable and relentless attempts that will be made to gut any carbon regulation. Once people start getting a “carbon dividend” check in the mail they won’t want to see it go. It could become an environmental “third rail.”
August 21st, 2008 at 3:07 pm
Why not just institute a very high Pigovian tax on carbon emissions, and use the collected revenue to reduce income taxes? It takes less work than a cap-and-trade system (no need for the government to calculate and set the cap, no need for a “carbon market”), and has the benefit of deriving directly from traditional economic and reducing personal taxes (something Republican voters like a lot).
This policy seems a lot more simple than cap-and-trade, and it’s much harder to corrupt this policy by a) giving away permits rather than auctioning them off, b) using carbon offsets as indulgences, and c) use the revenue for anything other than offsetting the cost for consumers. Simplicity is good and reducing taxes is something Republicans have a hard time arguing against, so this seems like an easier proposal than the cap-and-dividend idea.
August 21st, 2008 at 3:07 pm
Lets be honest here. There are some conservative intellectuals who favor stuff like this. Go read Ronald Bailey, or Andrew Sullivan, or similar libertarian-conservative folks who have been convinced of the truth of global warming.
However, no popular politicians (including liberal politicians) would ever support this proposal, because it runs over too many interest groups who would need to get paid off for substantial warming legislation to pass.
Matt is making the same mistake Thomas Frank does when he finds some corrupt conservative politicians and draws the conclusion that the conservative movement as a whole is corrupt. I dont see many liberal politicians clamoring to get rid of farm subsidies, but I dont draw the conclusion that the entire liberal movement is malign. Instead, I think that politicians are being politicians.
August 21st, 2008 at 3:08 pm
This isn’t a particularly new idea — see this book, published in 2001 — but it is very intriguing. Unfortunately, it’s never going to happen.
August 21st, 2008 at 3:15 pm
You might get more traction if you proposed giving the money to those struggling middle-class families pulling in a mere two or three million a year.
August 21st, 2008 at 3:55 pm
While this idea creates a means for a kind of “cap and trade” system to be politically popular, it fails to address certain basic flaws in the cap and trade system.
For example: How are these permits distributed? What happens if a firm buys more permits than they would ever use as a way of manipulating the market?
And most importantly: How is this any better than instituting a simple carbon tax and redistributing the benefits?
August 21st, 2008 at 4:01 pm
The part that is missing in any progressive discussion of cap and trade is the amount of bureaucracy and rule making that would be necessary on the enforcement side. If you think the tax law is complicated, wait until the lobbyists get done with cap and trade. A straight carbon tax would be much more efficient.
August 21st, 2008 at 4:20 pm
Obama’s plan has some dividend incorporated into it. I talked about a little bit back in May. You can use some of the revenues (~14% by CBO estimates) to compensate low and middle income families from higher energy costs. That’s where Obama’s $1000 energy rebate comes in.
August 21st, 2008 at 4:23 pm
Once people start getting a “carbon dividend” check in the mail they won’t want to see it go. It could become an environmental “third rail.”
Um, I don’t think get it. First, according to the cap and dividend website, the permits are sold to the sellers of polluting fuels, not the polluters using the fuels. In cap and trade, the cap is on emissions. What incentive under cap and dividend do polluters have to spend money to upgrade facilities and decrease emissions? None at all, if the upgrades decrease fuel efficiency, since they are just paying for the fuel, not the right to pollute.
If the permits are auctioned to the sellers of fuel, rather than the polluters, then the costs are passed directly on to all consumers in the fuels they buy for transportation, home heating, etc., rather than only to those consumers who purchase goods made by polluters. This idea of a trust fund that is your “birthright” and “dividends” from that fund then sounds a bit like a scam. The consumer just receives back from Exxon some of the money that they are paying Exxon to subsidize Exxon’s permits for the sale of polluting fuels.
As a consumer, this puts me in a 300,000,000-person prisoner’s dilemma, and gives me no individual reason to conserve fuel or change my fuel consumption habits – other than the higher cost of the gas in the first place. Nothing I can do as an individual has any real impact on the price I will pay Exxon, because the amount of fuel Exxon sells, and pays to sell, is determined by the aggregate behavior of everyone else in the country beside me. This is true whether I am a single person who owns an SUV or a company that owns a fleet of trucks.
And surely tacking the cost on at the supply end does nothing to change the behavior of suppliers. It’s not like Exxon is going to say, “Hey, let’s sell less fuel next year so that we don’t have to pay as much for the fuel selling permits.”
Finally, if revenues from permits go to government or citizens, doesn’t that create a bad incentive for politicians to establish an extravagantly high fuel sales cap, so they can then be responsible for sending citizens a really large dividend check? Where is the “cap” in all this? If we want to sustain the resolve to cap emissions, then we can’t build in any incentives for a sky-is-the-limit “cap”.
Isn’t this basically just an old-fashioned fuel tax, and supply cap, with a gimmicky and illusory free-money “dividend” tacked on to sell the public on the idea?
August 21st, 2008 at 5:05 pm
Dan Kervick,
You are right this gives consumers an incentive to reduce their fossil fuel use as opposed to their emissions per se–but that isn’t such a bad idea, when you consider reducing fossil fuel use has positive externalities in addition to the environmental ones (e.g., national security).
And that, by the way, is how consumers can benefit: if they can get their total fossil fuel use below the per capita average, they will be a net beneficiary of the program (since they will be getting more in proceeds than they are paying in tax). And the lower under the average they go, the more they benefit.
Or as the website says:
How will climate dividends affect me?
That depends on what you do. The more carbon-based energy you use, the more you’ll pay in higher prices. Since everyone gets the same amount back, you’ll gain if you conserve and lose if you guzzle. The ‘winners’ will thus be everyone who conserves fossil fuel — plus our children who inherit a stable climate.
Of course you are right that this is in some sense a “gimmick”, in that reducing other taxes would be just as good a way, if not better, to distribute the funds according to economic theory. But the point of the “gimmick” is the simplicity of the proposition’s effects (beat the average, and you benefit), which may make it an easier sell to consumers.
August 21st, 2008 at 6:06 pm
DTM,
It seems to me that the cap and dividend proponents, on the capanddividend.org site Matt links to and other sites like newrules.org, are running together two entirely different issues in a confusing and poorly motivated way.
Suppose we accept that the atmosphere is commons. The first issue is what sort of system should be set up to disincentivize activity that pollutes the commons. The fundamental question here is, “What is the best way to get people to stop polluting the commons?” Should we tax polluting fuel sales, or tax carbon emissions, or cap and sell permits for carbon emissions, or cap and sell permits for polluting fuel purchases, or cap and sell permits for polluting fuel sales, or what? Good questions. But what the schemes all have in common is that we exact a financial penalty in some fashion, directly or indirectly, for activity that pollutes the commons, and that is supposed to lead to people doing less polluting overall.
A second issue, and one really only weakly connected to the first, is what we do with the money that is thus extracted as a financial penalty for polluting the commons. This is an interesting question in itself, but the answer really doesn’t have a lot to do with the best system of disincentives to set up in addressing the first issue. Those disincentives work or don’t work on the basis of how and where the penalties are extracted, and how stiff the penalties are, whether the monetary penalties are then redistributed to the public, or are mailed to Africa, or are burned on an alter to Zeus.
Sure, as progressives, if we are going to collect monies for the right to pollute the commons, then we have an interest in seeing that those monies are disbursed in the most progressive way possible. Maybe that means giving every citizen an equal share. Maybe it means plowing the money directly back into pollution reduction measures, including research and development on alternative fuels and technologies. Maybe it means spending them on entirely different programs for the reduction of AIDS and Malaria in the developing world. But this is a quite separate question.
The discussion of “net beneficiaries” or “net payers” is odd and misleading, and has little to do with the structure of anti-pollution incentives. Yes, since as a consumer I am paying the cost of polluting the commons to the extent that the financial penalties have been passed on to through various products I purchase from fuel sellers, polluting producers, etc., then I have some incentive to reduce my spending on those products. But I have the exact same incentives whether or not I am receiving a dividend, and regardless of the size of the dividend.
Suppose I am receiving a $100 dividend, and am paying out $150 per year in added penalty costs built into the prices I pay for some of the products I buy. I have an incentive to reduce my expenditures on those products, and shift to less costly greener products that don’t have the same penalties built in. Suppose I can thus reduce my payout to $75 per year. I have now become a “net beneficiary. Woo Hoo! But I have no less incentive to reduce my payout to $75 if I am only getting a $50 dividend or a $0 dividend. The dividend is almost entirely outside my control, so my incentives are entirely built into my influence over my own expenditures of products with built in pollution penalties. Whether or not I become a net beneficiary has no rational bearing on my behavior. I have no realistic way to raise my dividend, or influence it in any way really, since my dividend depends on the aggregate behavior of millions of others, including the behavior of legislators in Washington about how much of a penalty to exact on carbon emissions, and how to distribute the proceeds.
I do worry that if we give the public, the owners of the commons, a direct payout from the funds collected as part of whatever carbon reduction scheme we adopt, we might actually incentivize bad public policy. Rather than increasing the public stake in lessening pollution of the commons, we have now given them an (admittedly small) incentive to permit more pollution, so they can get a bigger dividend. I can easily imagine politicians getting caught up in the annual game of Increase the Dividend, since people might start to use the dividend for Christmas presents or some other routine expenditure, and come to expect it, as well as expecting it to go up gradually. But, in fact, if the dividend goes up, that means we are failing at the main job, which is getting people to release less pollution into the commons.
August 21st, 2008 at 8:46 pm
Dan Kervick,
You are right the distribution of the funds is irrelevant to the usage incentives, but as I see it the purpose of this sort of distribution measure is political, not economic, in nature. Basically, we know contrary forces will attack any disincentive program as harming consumers. The point of a 100% return of the proceeds from the disincentive program is to reassure voters that the net financial effect on consumers will be zero. And doing it per capita again lends itself to a nice simple (and true) claim about “winners” under the program.
By the way, you could raise the size of the distribution not by increasing the amount of pollution, but rather increasing the proceeds per unit, which I suspect a lot of people would see as another beneficial political effect. Now admittedly that is harder if you have a cap-and-auction system, but then I think your worry becomes more a motivation for favoring something like a carbon tax, as opposed to a cap-and-auction.
And indeed, direct distribution of the funds or not, your worry about revenue maximization arises. For example, even if the funds just go into the general budget, that gives policymakers an incentive to increase the size of this revenue stream. So in that sense, your worry isn’t specific to this particular distribution plan.
August 21st, 2008 at 10:16 pm
A direct subsidy to consumers is ridiculous. Far better to make badly-needed, long term investments with that money. Subsidizing alternative energy and mass-transit, in particular.
August 22nd, 2008 at 11:16 am
Jono Says on August 21st, 2008 at 3:55 pm:
That may be because the flaws cited do not in fact exist.
In an auction of something like this, people put in their bids for volume and price, and the bids are sorted from high to low, and the price is the price that clears the market.
What prevents a commercial firm from buying more permits than they ever use is that there is no money to be made doing so, and in order to affect the price you have to buy enough to become the marginal buyer. A commercial firm in the habit of spending massive amounts of money on time-limited finance assets without a way to generate a positive return on them will shortly go bankrupt.
The problem is to arrive at a certain quantity of emissions.
The cap and auction system establishes permits corresponding to that quantity, and auctions them off.
The carbon tax requires guesswork and estimation to arrive at a tax that it is hoped will result in that level of emissions. It requires a mechanism to adjust the tax upward if the emissions level exceeds the target … and of course, the need to measure the emissions and determine whether or not we are off target means a bias toward over-emitting.
If the negative externality is defined in terms of a value cost, impose a tax, if the target is a tolerable quantity, find a way to establish a quota. The most flexible quota is to establish a market for permits.
The degree of difficulty in understanding that a pollution tax is in practice a more complex way to achieve a certain quantity target might be described dismissively as “principles of econ” level stuff, but in my experience students who are taking essentials of econ and who would not be capable of mastering the full principle of econ material are perfectly capable of mastering the point. So its “easier than principles of econ” level stuff.
August 22nd, 2008 at 11:24 am
Whereas a conventional tax is a fiscal drag, this kind of Pure Green tax is not. So where the macroeconomic effect of increasing the bias toward unemployment has to be leaned against with a conventional pollution tax, there is no need to lean against the effect of the Pure Green tax, because of the Social Dividend component.
However, there is an even stronger progressive political economy argument in favor of a Social Dividend as part of the cap and auction system. If there are dedicated funding streams to provided finance for what is in reality self-funding investment in R&D, where conservative political ideology is interfering with the government making sensible investment in support of protecting and expanding national productivity in a rising-energy-cost environment, there is a justification for using cap-and-auction proceeds to finance that self-funding R&D.
However, the action of the R&D if effective will be to reduce the price of the carbon permits. So if the balance of revenue is claimed by the state to fund government consumption, there is an incentive to avoid big programs that will take a serious bite out of carbon emissions. Handing back the balance, after funding the Energy R&D, removes that perverse incentive.
August 22nd, 2008 at 1:14 pm
I’ve always thought this was the best way to sell cap-and-trade to the public. Americans are generally skeptical of giving more money to the government and they have a good reason to be: the government often spends money in wasteful ways. It’s easy to understand why people will be fearful of implementing a cap-and-trade system that will generate tens (hundreds?) of billions of dollars that will just be handed over to the federal government while energy prices rise. Instead, cap-and-dividend would give all the money back to the American public in a clear manner. This seems like an easier sales pitch: we will reduce our country’s harmful effect on the environment by simply redistributing money from people who harm the environment to people who don’t, creating an incentive to harm the environment less.
August 22nd, 2008 at 4:05 pm
As Stern has said, “Global Warming is the biggest market failure the world has ever seen”–
This type of approach rights the market failure while not screwing the poor and creating the exact right market incentives (use less carbon, invest in non-carbon based energy) for the transformation changes we’ll need.
The recent $4 a gallon freak-out shows the political perils of raising energy prices without some fair mechanism for returning money to consumers/voters.
August 24th, 2008 at 3:41 pm
Bruce McF: The problem is to arrive at a certain quantity of emissions.
Actually, my main problem with cap and trade type approaches is that it assumes the government A) is capable of finding out what the optimal quantity of emissions is and B) has any incentive to actually choose that level.
The Pigouvian tax approach is indeed simpler because it does not require figuring out what the level is, but instead figuring out what the rough societal cost of each unit of emissions is. While this is not trivial, and while special interests will still lobby to distort the tax from this value (as they would to distort the cap from the optimal value), it’s still a simpler and easier problem.
August 24th, 2008 at 4:08 pm
To illustrate this more clearly, the optimal level of emissions depends on both the societal cost of pollution and the societal benefit from the production that resulted in the pollution (most people agree that the optimal level of emissions is not zero, due to the balancing of these costs and benefits).
Note, should a firm improve a product to result in a higher benefit but no change in emissions, the optimal level of emissions increases. A Pigouvian tax will allow the level of emissions to automatically adjust to this higher benefit. A cap and trade policy will not.
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