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Carbon Capping: Let's Do it Right! A Guest Post by Peter Barnes

Posted by Peter Barnes on September 11th, 2007

This guest post comes courtesy of Peter Barnes, former president of Working Assets and a fellow at the Tomales Bay Institute.  He is the author most recently of Capitalism 3.0: A Guide to Reclaiming the Commons.

Now that the debate about the science of climate change is effectively over, the next debate is about what to do about it.  The problem is, there’s no broad consensus on what policies will actually work.  Hundreds of proposals are floating about, and many of them aren’t very good.  It’s quite possible that bad climate policies will be adopted, and that more years will then be lost before real emission reductions occur.

We can’t let that happen.  That’s why we need to understand very clearly what different climate policies will do — and, just as importantly, what they won’t do. We also need to know who’s behind the policies, who’d pay for them and who’d benefit.  

Consider carbon capping.  In theory, a descending economy-wide carbon cap is the single most effective way for the U.S. to fight climate change. Such a cap could decline 2 percent a year for 40 years and get us where we need to go — to an 80 percent reduction by mid-century.  But not all carbon caps are the same, and it’s important to understand the differences.

Carbon capping comes in three varieties: cap-and-trade, cap-and-auction, and cap-and-recycle.

In cap-and-trade, 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 this extra money.

In Europe, a carbon cap-and-trade program with grandfathered permits hand­ed billions of Euros in windfall profits to a few large utilities. In the U.S., an MIT study   estimates that grandfathering permits to American utilities would give them hundreds of billions of dollars in extra profits every year for several decades. 

In cap-and-auction, permits are sold to polluters, not given away free.  Permit revenue goes to the government rather than to private companies.  What government does with the money is then up to public officials.

In cap-and-recycle, permits are also sold, not given away free.  However, the revenue doesn’t go to the government — it goes to all of us, one person, one share.   The model here is the Alaska Permanent Fund, which pays equal dividends to all Alaskans from state oil income.  This kind of cap is sometimes called a sky trust.

The kind of cap you prefer depends on your starting assumption.  If you assume the atmosphere belongs to whichever companies grab it first, then cap-and-trade makes sense. If you assume the atmosphere belongs to government, then cap-and-auction is your choice.  If you assume the atmosphere is a gift to everyone, then cap-and-recycle follows.

The appeal of cap-and-recycle is more than philosophical — it’s the only approach that protects our disposable incomes as energy prices rise.  That’s because, as the price of carbon permits rises, so will the dividends that come from selling them.  This difference will mean hundreds to thousands of dollars every year for every American.  And it will assure that the middle class supports a descending carbon cap for 40 years — something it might not otherwise do when energy prices soar.

The right climate legislation hasn’t yet been introduced.  But citizens across the country are gearing up to fight for real solutions that are fair to everyone.  That fight could culminate in 2009, when a new President and Congress take over.  That’s why, if ever there was a time to engage in climate politics, that time is now.

*Blog posts express the opinions of the authors.

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