SACE | Southern Alliance for Clean Energy

Carbon Tax, Cap & Trade or Cap & Dividend?


captrade.jpgWhile there is little question whether or not we need to reduce global warming pollution, there has been considerable discussion about how to achieve these reductions. Although talk of implementing a national climate policy has stalled, perhaps permanently, many still acknowledge that national policies in addition to personal actions will be required to achieve the scale of reductions that science says is necessary. Three commonly discussed policy mechanisms are carbon tax, cap & trade, and cap & dividend.

Carbon Tax
While “tax” is typically seen as a bad word, particularly in this hyper-partisan Congress, the concept of a carbon tax bears a closer look. A carbon tax would be a transparent, purely-economic policy that is just what it sounds like – a per-unit tax on greenhouse gas pollution. Many who support carbon taxes believe a tax on pollution would permit a decrease in taxes elsewhere, such as the payroll tax giving rise to the phrase ‘tax what you burn, not what you earn,” while creating a lucrative and much-needed revenue stream just as the United States hurtles towards a ‘fiscal cliff.’ Others are beginning to explore the idea of using the revenue from a carbon tax to provide rebates to consumers to help withrising energy costs. Additionally, proponents argue that a carbon tax would take care of many existing regulations and environmental laws that could all be accounted for in the additional price for pollution.

In addition to the negative associations with the word ‘tax’ while our country continues a slow recovery from the worst economic recession in over half a century, carbon taxes have another major drawback: they don’t necessarily help achieve specific, scientifically-based reduction targets for climate polluting gases. With a cap-and-trade program, discussed below, a law can tell polluters that only so much pollution is allowed. A carbon tax relies on the price itself to reduce emissions. The risk is that companies could simply roll the tax into the cost of doing business and pass along these higher costs to consumers. Prices could rise without specific decreases in global warming pollution or the guarantee that citizens and energy consumers would be protected.

Cap & Trade
First developed during the 1990s as a market-based approach to reducing acid rain forming pollution, an economy wide cap-and-trade program for climate pollution would use scientific recommendations to set a limit on the amount of heat-trapping pollution allowed, thus a ‘cap.’ The government would issue credits, or allowances, which each polluting industry or utility would need for each unit of global warming pollution it generates. Industries can sell or trade credits among themselves, and an industry that pollutes less would have more credits to sell to its competitors. A critical piece of designing such a program is deciding exactly how the credits are distributed.

Hundreds of prominent economists agree that the most equitable and efficient means of implementing a cap and trade program requires auctioning off all or many of the credits instead of giving them away to polluters for free, read their statement to Congress here. Where cap and trade programs already exist, policymakers have found that giving away credits to polluters for free simply hands them a windfall profit while consumers are left holding the bill. Auctioning carbon credits also generates revenue, which the government can use to offset rising energy costs or invest in clean energy solutions. More thoughts on why 100% auctions are critical can be found on the North Carolina Conservation Network’s website by clicking here.

Cap & Dividend
A policy based on the concept of auctioning all credits is cap and dividend: a transparent, market-based approach to reduce heat-trapping emissions while minimizing impacts to consumers. Although a cap and dividend system would place a descending, economy-wide cap on fossil fuel pollution like a cap and trade system does, there are two marked differences. A cap and dividend system is designed to cap pollution at the carbon suppliers rather than the carbon emitters to ensure that “up-stream” emissions, such as those generated from drilling and transporting oil to an oil refinery, are accounted for in the market. The other major difference is that all pollution credits would be auctioned with a large portion of the revenue returned to consumers on an equal basis to offset rising energy costs.