Cap and Refund

In recent news it is looking as if President Obama's plan to reduce greenhouse gases is going to follow a "Cap and Refund" model.

In this plan the EPA would auction a maximum number of CO2 credits for a given period of time, and the money raised from the auction would go primarily to lower and middle income citizens via a means tested tax credit, with additional portions set aside to aid economically struggling regions of the country and industries that are going to be hard hit by the need to buy carbon credits, and a small portion set aside for research and development of renewable energy.

How does this compare to other proposals to limit carbon dioxide emissions?

Well once we eliminate suggestions such as voluntary human extinction, dismantling industrial society by any means necessary, or doing nothing here are some of the options.

1) Carbon Tax: This system would not put a ceiling on the amount of carbon dioxide that can be emitted like a cap and trade system would. Theoretically putting a price on carbon dioxide emissions would provide an incentive to emit less, but it would be hard to translate this into an overall national reduction in emissions. Another danger is the creation of a potentially very regressive tax.

2) "Traditional" Pollution Limits: In other words this could assign a maximum amount of a particular pollutant that any individual source is allowed to emit. Examples of this would include requiring factories to report their emissions levels to the EPA and requiring your car to pass an emissions test. In this framwork limits are usually set based upon a compromise between desirable outcomes (air quality, water quality, total national greenhouse gases) and what is then considered technologically feasible.
This might have been a decent stop-gap option for slowing climate change. That is if it had been started no later than 1980 or so!!
Such a program might have curbed carbon emissions but would not have provided any guarantee of decreasing the total national level.

3) Other cap and trade options:

a) Cap and Allocate: In this scenario a cap is set and credits are allocated to certain parties. In some cases these parties may be allowed to trade these allowances on the open market.

In the US a basic Cap and Allocate system was applied with the EPA's Acid Rain Program in which a market for sulfur dioxide was created. And it was both successful at preventing acid rain and showed that with money incentive that cutting emissions was made cheaper than previously expected.

b) Cap and Grandfather: Basically this is a version of cap and allocate where initial limits are based largely on historical emissions. This was largely the case with the Kyoto protocol, and in the initial phase of the European Union Emission Trading System, until reforms were added so that an increasing percentage of the carbon credits were put into an auction system. Most criticism of cap and grandfather center on the inequality of rewarding those parties on the basis of past emissions and economic inequality.

c) Cap and Auction: In this system the limited number of pollution credits are entirely auctioned by the Agency in Charge to the buyers for a given period of time. In this scenario nobody is "entitled" to any credits based on historical use or any other consideration. Of course, there are a variety of proposals exist on how to use the money from the auction ranging from general government funds to creating a long term trust fund in which equal checks would be mailed to each citizen on a year basis after the yearly dividends reached a certain size. The Alaska Permanent Fund in fact, does exactly that with percentage of the state's oil revenue.

President Obama's Proposed Cap and Refund is basically a version of cap and auction in which most of the revenue is used basically as a socioeconomic equalizer and a buffer against any economic shocks that might be created by it.

d) Cap and Share: This concept involved taking the carbon emission credits and distributing them equally to each adult citizen, with the right to use, sell, or retire prematurely as he or she sees fit. This was endorsed heavily by Dennis Kucinich, and has been supported by many as a form of direct economic democracy. Many of these proponents have suggested that people could sell or buy credits, at carbon credit firms (in fact pollution credit firms already exist in the real world even if most people have never dealt with them), and other locations. Critics claim that such a system would be susceptible to severe price instability and various shenanigans on the part of both powerful organizations and small time con men.

4) Relying on new technologies and conservation as a "Personal Virtue". This isn't a real system, but it had to be mentioned.
Ultimately this system would tend to make the virtue of conservation, the booby prize for people willing to scrimp on energy so that somebody else can drive a hummer on cheap gas for as long as possible.
And it will take years for a full transition to a carbon neutral energy economy.

For a long time I was personally inclined to support a carbon tax even while campaigning for Obama, because I feared that a Cap and Trade system was likely to be a Cap and Grandfather. When I was a radical 19 year old, I loved the idea of a Cap and Share system. Now I think that Obama's Cap and Refund system is the best option that we are realistically likely to get in this time and with the situation we are facing.
Currently, I don't think our economy can handle a system that does not involve putting money back into the hands of ordinary citizens. And that the need to cut emissions is too urgent for experimental ideas like Cap and Share.

In fact, the biggest downside to Obama's cap and refund, may be the downside to any plan we can choose this late in the game. It might not be enough to prevent global warming without additional measures.

The world may have to look for ways to remove greenhouse gases from the atmosphere or otherwise mitigate their consequences. Of course, that task would be much harder than not emitting them in the first place. And many of the options could have environmental consequences of their own. We could discuss some of those ideas in future blogs if you like.

See you next post! And:

Say goodnight readers!