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Please begin with an informative title:

Amid all the discussions about potential paths forward in terms climate legislation, there is basic agreement about the need to 'put a price on carbon' to incentivize reducing carbon intensity (and usage ... or, actually, dumping into the atmosphere) throughout the economy.

Should we pursue a Carbon Cap (or A CAT, a Cap, Auction, and Trade) or some form of Carbon Tax (or fee)?

And, then the debate turns to "what to do with the resources".  For many, the best answer seems to be some form of Cap & Dividend program.  The idea of sending money "back" to people has great appeal, for many reasons but what about looking behind the curtain. Does it continue to make as much sense?

Intro

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Pricing Carbon ...

Most concerned about Global Warming mitigation do not see a path away from wasteful polluting fuel use without placing some form of pricing on carbon.  There are, in general, two paths toward achieving this: A Cap (or CAT) or a tax (or, better framing, fee).  Very simply, the shorthand:

  • A Cap (or CAT) provides certainty (of some sort) as to the level of emissions (the maximum) and no certainty as to revenue streams.
  • A Carbon Tax (or Fee) provides some certainty as to financing, but not necessarily assurance as to reduced levels.

Once revenue starts flowing

And, then the debate turns to "what to do with the resources".  For many, the best answer seems to be some form of Cap & Dividend program as enunciated best by Peter Barnes in Capitalism 3.0.  (This work is compelling, on multiple levels, and well worth the read.  My head nodded in agreement with many passages, much of Barnes' framing of discussion and the challenges we face.)

In short, the concept is to return to the public (variously defined: citizen; resident; taxpayer) the funds collected (either in large part or entirety), to make the system 'revenue neutral' and, in essence, buy allegiance and support for the carbon price system (whether, again, Cap / Auction / Trade or a carbon fee).  Someone who is an "average" polluter would be revenue neutral, "high" polluter would pay more than they get back, and "low" polluter would end up earning more money from their 'carbon frugal ways'. In addition to providing incentives to reduce polluting energy use, such a system would also serve as a reversal of the regressive element of a carbon tax and foster improved social equity.  And, Barnes represents this as "the" solution, a Silver Bullet path that will enable everything else to fall in line so that we can deal with Global Warming mitigation with greater ease.

This seems so simple.  So clearly appealing.  And, well, I've conceptualized including a variation of as part of a Global Warming Impact Fee.  Yet, even within its appealing nature, the Cap & Dividend might just have such complicated problems to make it an extremely appealing prospect, on the surface, that shouldn't survive detailed scrutiny.

Why?

1.  Does the price signal work effectively, especailly against promotion of energy efficiency?

2.  Can we "afford" to fund consumption and does the dividend work putting resources be put to better use?

3.  The transfer of wealth isn't only rich to poor, heavy polluters by choice to low polluters, but is also regional in a way that will not truly assist moving toward a lower carbon environment.

Price signal isn't enough and Focus on Energy Efficiency

A year ago, Joe Romm did an excellent discussion of the importance of energy efficiency standards and how a carbon price (and dividend program) works against that.    

at its most basic level, a price for carbon most directly encourages fuel-switching (especially from coal), but does not particularly encourage efficiency. That's why most traditional economic models require a very high (read "unduly brutal" and "politically unacceptable") price for carbon to get deep reductions.
Certainly, in the near (next five years) term, energy efficiency is the fastest and best payoff path toward carbon emissions reductions. And, it is an investment that continues to pay back and continues to improve in potential.  But, a "price" is not an effective enough signal for energy efficiency.

Afford ...

What we need most is to shift "consumption" spending to investment.  The "dividend" concept simply pushes consumption money around, fostering a continuted appetite for spending today over investing for tomorrow. And, even as we see a $800+ billion stimulus package going through, eventually the game of Monopoly goes away and we need to deal with the consequences of massive public and private debts.  The 'carbon fees' could be the critical source for funding necessary investments in energy efficiency, clean energy, improved agricultural processes, land remediation, forest protection and reforesting, adaptation, disaster response, etc ...

Fundamentally, Barnes' argument is a combination of major government policy and free-market libertarianism.  While the government would put in a large program for a carbon fee, Barnes is, in essence, making an argument that the individual and market know better than government and 'the decision of the crowd' is enough to drive us off carbon once there is a price set against using carbon.

Transfering wealth

Barnes deals well with how a dividend would represent moving funds from polluters to non-polluters and how this would, writ large, be progressive (as opposed to the 'regressive' nature of energy taxes, at least without considering how funds would be used).  Here, however, we really start to get into the devil of the details. How will government "carbon" costs be assessed and then allocated?  Will all government entities (and non-profit institutions), at all levels, pay these carbon fees?  Hmmm ... awful lot of groups would seek exemption for all sorts of good (or bad) reasons.  

More importantly, a nation-wide system would create a mass resource shift from coal-heavy (and wide expanse (e.g., longer drive)) areas to renewable / nuclear power urban areas.  This would move resources out of the areas which most require resources to be able to move off polluting energy sources and to develop more energy efficient transport/smart growth paths.  

And, in terms of complexity, this 'split' can occur literally across a street or between neighbors, as two power companies might have very different power mixes to their electricity supply: something that might be out of the control of the 'average' user.  

While, on first blush, Cap & Dividend seems so appealing (and has a growing number of adherents), issues like those above should suggest a pause in the speed of embrace.

Extended (Optional)

Originally posted to A Siegel on Sat Jan 31, 2009 at 07:50 PM PST.

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