"Cap-and-Dividend:" A Realistic "Replacement" for Cap-and-Trade?

In contrast to one year ago, few people in the U.S. now believe that the U.S. Congress will be able to agree anytime soon on a greenhouse gas emissions-limiting bill that focuses on cap-and-trade.

Last summer, with the passage in the U.S. House of Representatives of the Waxman-Markey Energy bill there was some expectation that the Congress might be able to cobble together something. However, in the wake of the Obama Administration's inability to push through a health care bill, no one is holding their breath now in anticipation of a cap-and-trade measure.

Despite the palpable disappointment of many "greens," a cap-and-trade approach -- similar to what the European Union has agreed on -- may be a nonstarter. What might replace it, however, is a measure that has been characterized as "cap-and-dividend." Introduced in December 2009 by United States Senators Maria Cantwell, Washington state Democrat, and Susan Collins, Maine Republican, the cap-and-dividend measure has begun to attract a growing amount of attention.

The cap-and-dividend concept works in this manner:

• In 2012 the president will set an initial target amount of carbon from fossil fuels that can be emitted without disrupting the economy. The cap will gradually decline.
• Revenue generated by "carbon permits" comes from producers and importers of coal, natural gas, and oil. In other words, a power plant that burns coal does not buy carbon permits; they are paid for by the mining company that mined the coal. Using this approach, the "upstream" point of regulation means that only 2,000 to 3,000 fossil fuel producers and importers will face any new compliance obligations.
• Carbon price permits will be determined by a bidding process among fossil fuel companies participating in monthly auctions. Only entities with a compliance obligation are eligible to participate -- no Wall Street traders or speculators will be allowed in.
• Seventy-five percent of revenues will be returned to consumers (as a "dividend") directly each month on an equal per capita basis to offset energy cost increases. Average annual refunds for a family of four are estimated to be about $1,000. According to Senator Cantwell, "Sending auction revenues directly to consumers means 80 percent of the American public will incur no net costs and the lowest income population will receive net positive benefits."
• Twenty-give percent of revenues will go into the Clean Energy Reinvestment Trust Fund to pay for additional greenhouse gas emissions reductions, low-carbon energy investment, climate change adaptation, and related regional economic adjustment projects.

Publications ranging from The Economist to The Denver Post have written positively about the concept. For example, The Economist ("A Refreshing Dose of Honesty," Feb. 4, 2010) wrote that the bill "is refreshingly simple. At a mere 40 pages, it is one thirty-sixth as long as the monstrous House bill (known as 'Waxman-Markey' after its co-sponsors), which would regulate everything from televisions to 'bottle-type water dispensers' and is completely incomprehensible to a layman." Similarly, The Denver Post editorialized ("Fresh Start on Carbon Battle," Feb. 16, 2010), "[T]he structure of the system would encourage conservation and give Americans a big incentive to burn cleaner fuel...We very much like that it would avoid the creation of a vast energy-trading market such as the one envisioned in the Waxman-Markey bill."

Will the bill succeed? Good question and one not readily answered at this early stage. But nevertheless, a few observations:

• Wall Street bankers are not going to like the measure since it cuts them out "of the action" associated with permit trading.
• Fossil fuel companies are not likely to support it either for obvious reasons.
• The current simplicity of the measure means that all of the back room deals that were cut in putting the Waxman-Markey bill together will be gone, thus disappointing many Representatives who had worked hard to battle for their districts' interests (real and perceived).
• Some sectors of the economy won't like it either since they have been granted hugely favorable treatment in the House bill.

On the other hand, in Washington's current partisan stalemate the fact that a Democrat and a Republican senator have signed on to the bill is worthy of mention, but this in and of itself probably doesn't mean a great deal right now.

There are many difficult legislative issues on the 2010 political agenda -- jobs, financial sector regulation, health care -- so don't expect too much time devoted to cap-and-dividend. Only time will tell whether it is a game changer or merely another legislative idea destined to hit the scrap heap of other "good ideas" that came to naught. But it is a concept that all of us should keep in mind.

Click here to see the bill as originally introduced, and click here to see an in-depth overview of the measure.

Don C. Smith