Carbon Caps With Universal Dividends

Many proposals addressing climate change advocate for a cap on greenhouse gas (GHG) emissions or carbon content of fuels.  The limiting and lowering of carbon or GHG emissions will create a new market value for carbon. Many agree that there should be a 100 percent auction of carbon permits, and estimates indicate that carbon allowance auctions could raise $50-$200 billion annually at the national level. However, there are many different opinions as to how this money should be used.

In his book “Who Owns the Sky?” Peter Barnes writes that the atmosphere is commons, stating we all have equal rights in the limited absorption and recycling capacity of the atmosphere.  This also means we all should have equal emission rights, but only to the extent the emissions do not alter the climate.  Since the sky is owned by all us, any value created to protect, or curb our harmful emissions belongs to everyone, equally.

Toanswer the question on what to do with this enormous pool of money, we start by adopting the atmosphere as commons principle. In looking at the distributional impacts and the economic effects of a carbon allowance auction, we find that a universal disbursement of equal dividends is the most effective way to create a carbon cap policy that is ethical, equitable, and conducive to being politically successful.

Functionally,a cap on carbon will raise the price of energy and, indirectly, goods and services.  If this money is not returned to society, the auctioning of carbon permits will have a very regressive economic impact. However, if the money is returned to people on an equal basis, high-income households will tend to pay in more (in higher energy and product costs) than they receive back from dividends, while lower income households will receive back more than they pay.  This happens because higher income households tend to use more energy and buy more products than lower income households. To maximize the “value” of their dividend, consumers will work to change their energy consumption habits. Peter Barnes notes “The more energy you use, the more you pay,”and “how you fare depends on what you do.”

As an example, a modest $50/metric ton carbon allowance price would result in a net benefit of about $100 per year for lower income households, while costing higher income households about $60. (Please see our policy brief for the details).

Acarbon cap with universal dividends will inspire substantial investment in clean energy technologies while protecting tens of millions of households from the impact from potentially steep increases in energy prices resulting from the cap.

The major elements of the carbon cap with universal dividends policy:

  • A carbon cap should be comprehensive, covering all major sources of carbon or GHG emissions.
  • 100% of carbon allowances should be sold by auction
  • Safety valves or ceiling prices for carbon allowances should not be allowed
  • Carbon offsets should be forbidden or extremely limited
  • Revenues from auctioning carbon allowances should be distributed on a per capita basis in equal amounts.

You can view more detailed information and arguments for a policy of carbon cap with universal dividends in our January 2008 policy brief, Carbon Caps With Universal Dividends: Equitable, Ethical & Politically Effective Climate Policy.

In January 2010, California’s Economic and Allocation Advisory Committee (EAAC) issued a report recommending that roughly 75% of allowance value from carbon auctions in California should be returned to California households.  The report states that “roughly 75% of this value should be returned to households either through lump-sum payments…” and “roughly 25% of this value should be devoted to financing investments and other public expenditure…”.

In late 2009, a federal cap and dividend proposal was introduced by Sen. Maria Cantwell (D) and Sen. Susan Collins (R), the Carbon Limits and Energy for America’s Renewal (CLEAR) Act.  With the Senate deadlocked on the current iteration of a cap and trade bill, combined with California’s support for cap and dividend, the CLEAR act might be poised to save the day on some sort of federal climate policy being enacted.