Why Fee-and-Dividend is superior to Cap-and-Trade
Sep 16, 2010

Why Fee-and-Dividend is superior to Cap-and-Trade

As the world recoils from the failure of Copenhagen but is bolstered in our commitment by the news that the first half of 2010 is the warmest on record, it is imperative to consider the various carbon policies that we try to commit to. For the most part that policy is the so called cap-and-trade, as it was for Kyoto and other non carbon air pollution management agreements. However, their are significant problems with this policy and I will discuss here why we should push for fee and dividend schemes instead.

I establish first the terms and assumptions. Let me assume for the purpose of this discussion to accept the premise of climate change and the need to actively reduce specifically carbon emissions; the scope of this post is exclusively on the best policy for an international carbon reduction scheme, given the assumed need for one. Cap and trade is a policy where a fixed quantity, or cap, is mandated on carbon emissions and a market created whereby polluters who increase their emissions must buy credits from the market and those that decrease them can sell credits to the market. Fee and dividend charges a tax directly on carbon pollution and then uses that money to give back to the people in various ways such as a direct dividend. Both systems in general accomplish the same goal namely raising the price of carbon which will in theory reduce the amount of carbon emissions and increase the price competitiveness of other cleaner energy sources.  However, the differences are significant enough to make the later superior for the following reasons I will argue.


The arguments against cap and  trade begin with two pragmatic points and then continue to more in depth ones about their actual nature. The first pragmatic point is simply that any cap and trade scheme currently produced won't come close to being sufficient. Just as world carbon emissions increased substantially under Kyoto, so to will they under any new proposals using the same scheme; we are trying to make an empirically failed policy work. Estimates from the optimistic plans show "business as usual" for at least 17 years, and in all likelihood as countries fail to meet their objectives like with Kyoto the increases extend beyond that.

Secondly is the simple reality that a comprehensive and effective cap and trade legislation that includes China and India isn't going to be passed. Nor should it! Both countries have been very explicit about this in the negotiations. The problem is one is capping not just their emissions but their economic growth which is hardly fair morally and won't be accepted pragmatically. Now this doesn't mean either country is resistive to climate legislation in general, indeed both countries see clearly the perils of a fossil fuels dominated economy (from a limited availability to environmental and warming consequences) and are investing enormously, China in particular, into nuclear, hydro and other cleaner forms of power. A fee and dividend scheme works with a growing china and india because it preferentially selects for non carbon energy which is something they want anyways.

Thirdly, there is a significant difference in who benefits. In cap and trade, the direct (I will talk about indirect in the next point) benefactors are big polluters that manage to make modest cuts. In fee and dividend the benefactors are all the people. For example in a 100% dividend scheme to the people in the US, the roughly bottom 60% of people would experience a net benefit. If one chooses not a 100% dividend and flows some of that money into, say, clean energy subsidies or research the result is still a benefit to the people and not to big polluters who are now polluting a little less. Under cap and trade a big company like Enron that reduces it's operations in some jurisdiction can reap enormous credit benefits to be spent in other jurisdictions. Other than direct dividends or clean energy subsidizes, sole of the money can be spent on either environmental or social justice, helping those who suffer the extreme consequences of global warming (such as fisherman in Luisiana after the BP spill) or on aiding a smooth and just transition through such things as stopping the deep water drilling but investing in Luisiana to help those whose livelihood depended in fossil fuel extraction.

Fourthly, cap and trade creates an artificial and closed market that already experiences and will only increase a high degree of penetration from financial and other of the largest corporations on the planet. Unlike a normal access market where you and I can influence things by not buying from Walmart or McDonalds, the average person has no ability to influence these high level credit trades between influential corporations, we are shut out of this artificial market. Because it is going to be (if made pervasive and large enough, highly questionable) a multi trillion dollar market, it will be entirely dominated by big financial interests. Already we have seen companies like Goldman Sachs use cap and trade markets to form speculative bubbles. Now it is clear that market principles are needed to drive innovation and efficiency, and both cap and trade and fee and dividend use them, but the latter applies its artificial forcing (increasing the cost of carbon) in the most direct and simple away and allows the completely normal market we all participate in to make the appropriate adjustments, with no need for new financial instruments, speculation or domination by corporate interests. Furthermore, as a moral issue cap and trade is essentially the financial commoditization of a common good.

Fifthly, fee and dividend removes a lot of the inequities of cap and trade, while retaining the ability to be sensitive to the inequity adjustments cap and trade is sensitive to.  A country like Russia which has enormous forests doesn't get a clean slate and low targets because of it. However, there are certainly still many concerns about inequities but I wish to emphasize that all of the adjustments one makes for these inequities in cap and trade can be carried over to fee and dividend. So for example, because a developed country has the expertise and infrastructure to do things like large nuclear or even smaller clean energy projects, it buts developing nations that rely on coal and charcoal at a huge disadvantage. However just as one sets the caps higher in cap and trade for developing countries, one can set the tax rate lower for them. Especially if some of the dividends are used for international technological development to help aid these differences. Furthermore, issues like removing natural carbon sinks like forests can be addressed in fee and dividend as well whereby a removal of a sink is also charged.

It is often suggested that fee and dividend - a tax - will not be politically acceptable. One merely needs to look to BC, Canada which has introduced recently a fee and dividend scheme to see that quite the contrary an election was determined in its favor. There has been a lot of movement on advocating this policy at the Peoples climate talks in Bolivia, it is supported by leading environmental groups like the Sierra Club and by leading scientists like James Hansen. When we consider the various factors above I believe it is clear that the west should follow the models and advocacy of so many and push for a fee and dividend system that has a chance of not only getting passed but being effective, equitable and responsible.

Thoughts on this post? Comment below!

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