Their approach has elements of both a cap and trade system and a revenue neutral carbon tax. In a pure cap and trade system, the government sets a total amount of carbon in the economy which decreases over time, carbon allowances are auctioned off and are then free to be traded and bought by any entity who wants them from any entity who has them. Under all of the existing congressional proposals, a significant amount of allowances are given to industries as a starting point, instead of being paid for from the beginning. The benefits of these proposals are that they fully harness market powers to allow businesses a maximum potential profit for carbon reduction and innovation. The downside is that it leads to a painful transition to a clean energy economy, and there are significantly higher energy costs involved in the interim.
A carbon tax is precisely what it sounds like, a direct price on carbon emitted. Some proposals have suggested taking the proceeds from that tax and returning to consumers it in the form of a tax rebate on anything from the payroll tax to the income tax, in order to compensate them for the resultant increase in energy prices. Its upside is its directness, predictability, and simplicity. Its downside is that it places no descending cap on emissions, leaving a significant amount of the carbon reduction that results up to chance and a market response to the tax itself. Furthermore, the political will to have a carbon tax high enough to make a significant effect is questionable.
Which leads me to Senator Cantwell's proposal, the Carbon Limits and Energy for America's Renewal (CLEAR) Act (Senate Bill 2877, for those interested). Her proposal outlines a cap-and-dividend system. What the CLEAR Act would do is place a descending cap on emissions that would reduce carbon pollution by 83% by 2050, in line with what is necessary to effectively combat climate change. It would auction off ALL carbon credits, forbidding their trading on open markets. It would then take the proceeds from the auction, return 75% of it to consumers on a per capita basis, and spend the other 25% encouraging renewable investment, helping struggling small businesses and regions with transition costs, and other miscellaneous activities to help mitigate undesirable side-effects of a carbon price.
I actually prefer this solution to Waxman-Markey OR Kerry-Lieberman. First and foremost, it provides the necessary carbon reductions in a meaningful time frame. Second, it provides compensation to the tune of $1,100 per year for a family of four. That it provides this money on a per capita basis rather than in the form of tax relief makes it a progressive system, giving money to all instead of leaving out the poor who don't pay income taxes or those who aren't paying payroll taxes (like retirees). The amount given should more than cover the increased costs of those with lower or mid range incomes, in effect making many better off than before while requiring the energy use-heavy high end to pay more.
Also, it essentially concentrates the costs of carbon on carbon producers. Because the bill auctions the allowances to the producers of carbon (oil and natural gas companies, etc) rather than the emitters, it avoids the costly bureaucracy of "smokestack monitors" and corrals the problem upstream, so to speak. When carbon producers pass their costs down the line, consumers will have the additional funds originally taken from the producers themselves to defray the additional cost. Its economy-wide nature sets a clear carbon price that is the same to everyone, increasing predictability and spurring market innovation in the right places.
Finally, the forbidding of selling credits on the market and strict regulations on carbon futures trading (among which is included a restriction on those who buy credits from engaging in derivatives trading at all) ensure that the carbon market will not be preyed upon by speculators in the way that many European carbon markets have. Jack Conway has been adamant on avoiding "enriching stock brokers", and a cap and dividend proposal may help allay his concerns if the problem were to slip into the next congress and he were elected to it.
If attached to a serious energy bill with strong renewable investments and some support of natural gas and nuclear power as transition fuels, a proposal like the CLEAR Act may well be a way to achieve broad climate goals in a relatively bipartisan way without sacrificing extensively on principle. In fact, this proposal seems to have more merits on the basis of progressive values than any I have yet seen. I don't know if this bill has yet been brought to the attention of the dKos community, but if you see the potential I see please tell a friend and write a Senator.
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