CAP AND DIVIDEND

Van Hollen Climate Bill To Feature “Cap and Dividend”
Chris Holly, February 26, 2009 (Energy Daily via Cap and Dividend)
and
Debating Cap-and- _____ (Fill in the Blank)
Kate Galbraith, April 6, 2009 (NY Times)

SUMMARY
Congressman Chris Van Hollen (D-Md), chair of the Democratic Congressional Campaign Committee and a close ally of House Speaker Nancy Pelosi (D-Calif), has introduced legislation into Congress that would create a variation on cap&trade many call Cap and Dividend.

Cap&trade is the market-based system used on a limited scale to beat acid rain in the early 1990s and being developed in the European Union (EU) Emissions Trading Scheme (ETS) as a method to cap greenhouse gas (GhG) emissions and reverse global climate change.

Everyone who accepts the proposition of global climate change (which is everyone but the most uninformed or recalcitrant of skeptics and far more than 90% of all experts who thoroughly understand the science) likes the idea of a “cap” on emissions.

When emissions are capped, big emitters (power plants and utilities) will be forced to purchase “allowances” to spew, via a federally administered auction. As the caps are made tighter, the price of allowances will go up. When big emitters are forced to pay, they will naturally be forced to pass the costs on to utility ratepayers but the auction brings in federal revenues which can be used to reimburse ratepayers and neutralize their costs.

The “trade” part of the cap&trade equation is more controversial. The EU ETS is a trading market where allowances are sold by big emitters whose shift to emissions-free New Energy and Energy Efficiency eliminates their GhGs and their need to apply the allowances they bought at auction. Allowances are also bought in the EU ETS marketplace by big emitters whose continued generation of GhGs forces them to obtain more allowances to continue doing business.

The idea is to make doing business by generating GhGs too expensive to be practical unless there is absolutely no better choice. As a brand new kind of market, the EU ETS has been controversial as experience has revealed kinks, loopholes, scams and surprises in the trading system.

Congressman Van Hollen’s idea is to eliminate the controversy by immediately remitting the revenues from an emissions allowance auction to the widest spectrum of the public. Besides its simplicity, Cap&Dividend makes almost every citizen a partner.

click to enlarge

Another difference between Cap&Dividend and the EU ETS is that the Van Hollen plan also would auction emissions allowances at the point of origin (“upstream,” to the oil importers, coal miners, etc.) rather than at the point of distribution (“downstream,” to oil refiners, utilities, power companies, etc.)

While the cap&trade system is expected to provide revenues to fund a scale-up of New Energy and Energy Efficiency, the Van Hollen plan would remit 90% of all auction revenues to everyone with a social security number via a direct bank deposit or an anonymous debit card.

Cap&Dividend is based on the work of Peter Barnes, who stressed fairness by including everybody in the benefits and simplicity by auctioning upstream instead of downstream.

click to enlarge

COMMENTARY
The forces against cap&trade are gathering a fascinating set of lies to lay the idea – the centerpiece of the Obama administration climate change agenda – as low as Wall Street’s spirits were in January.

The President's opponents have already begun their campaign with the half-true claim that cap&trade will drive utility prices up, neglecting to mention that power prices will inevitably rise with or without a trading system while cap&trade is a way of raising federal revenues to neutralize the utility price increases and build a New Energy and Energy Efficiency infrastructure that will control power prices over the long term.

Sooner or later, the President's oppopnents will say cap&trade is (1) the biggest government tax ever leveled, (2) the biggest government give-away the Democrats ever voted for, (3) corporate welfare, (4) Wall Street welfare, and (5) welfare for freeloaders who can’t pay their utility bills.

In this especially market-doubting moment, the U.S. public may find it extremely difficult to trust a new emissions trading scheme like the EU ETS, even one backed by the widely-trusted new President. And even if Mr. Obama is able to sell cap&trade to his base, it is entirely likely the recalcitrant minority of Republican naysayers in the Senate would block any climate change legislation with a cap&trade provision.

click to enlarge

It is interesting that Senator Bob Corker (R-Tenn), one of the Republican conservatives who has so far worked against President Obama, has been a strong supporter of Cap&Dividend. Politically, it is possible – and this could have something to do with Senator Corker’s enthusiasm – the Van Hollen idea could split support for cap&trade between those who want caps but distrust the market idea and those who mainly support the trading part because its revenues would go to fund New Energy and Energy Efficiency.

Like the Obama cap&trade proposal, Van Hollen's would auction 100% of the emissions allowances. The President has recently indicated he might be willing to compromise on the 100% auction in the early phases of a cap&trade program in order to gain support from moderate Republicans like Senator John McCain (R-Ariz), who in the past has supported cap&trade with an initial 60% auction of allowances. Many Congress-watchers believe that if climate change legislation still has a hope, it will be the provision for the percent of allowances auctioned that will be pivotal.

The Sierra Club is among those who have proposed compromise measures. The Sierra Club calls its idea “cap and auction.” It builds in protections for consumers if cap&trade costs get out of hand. Cap and auction and other such ideas are bridges between the intent of the Van Hollen plan and the market basis of cap&trade – but they don’t simplify the matter or resolve public distrust of markets and big government.

click to enlarge

QUOTES
- Congressman Van Hollen: “[Cap and Dividend will cap emissions in 2012] and establish a scientifically driven glide path to a minimum 80 percent reduction in carbon emissions by 2050.”
- Congressman Van Hollen: “At its core, any successful climate change bill must deliver scientifically based emissions reductions while enjoying broad public support from the American people—and it must continue to do both for at least 40 years…In that regard, I believe there is one approach that offers the best chance to get the job done: cap and dividend.”

From capanddividend.org

- Carl Pope, Executive Director, Sierra Club: “[Cap and auction] establishes an escape valve for periods of high permit prices without weakening the overall signal to capital markets to aggressively invest in low carbon opportunities; it provides a mechanism for buffering carbon-dependent communities against high transition costs, and it recognizes uncertainty.”
- Robert Samuelson, economics columnist, Washington Post: “If environmentalists still prefer an allowance system, let’s call it by its proper name: cap-and-tax.”