CAP&DIVIDEND CLEAR-ED FOR CONSIDERATION

CLEAR Economics: State-Level Impacts of the ‘Carbon Limits and Energy for America’s Renewal Act’ on Family Incomes and Jobs
James K. Boyce & Matthew E. Riddle, March 2010 (Department of Economics and
Political Economy Research Institute/University of Massachusetts, Amherst)

THE POINT
Remember when health insurance reform was pronounced a lost cause? That’s where Cap&Trade and the effort to get the U.S. into the fight against global change are now. If they are to go forward, lawmakers must find a way to stop U.S. greenhouse gas emissions by putting a price on the generation of them without stopping U.S. economic growth or overburdening U.S. energy consumers.

In place of Cap&Trade, some would substitute Cap&Dividend. CLEAR Economics: State-Level Impacts of the ‘Carbon Limits and Energy for America’s Renewal Act’ on Family Incomes and Jobs is one of the first neutral and academic evaluations of the Cap&Dividend concept, which would cap U.S. greenhouse gas emissions (GhGs), charge the major emitters for what they spew via an auction of allowance permits and redistribute the revenues from the auction as dividends to all citizens as compensation for the burdens they would bear in the form of higher energy costs.

The study finds that Cap&Dividend could drive a transition to New Energy (NE) and Energy Efficiency (EE) that would create 360,000 jobs from public spending and many more as private spending shifts from Old Energy to the New Energy economy. The public spending could also be designed to support more job growth in states with high unemployment and high dependence on Old Energy.

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Despite the relatively minimal costs that would be imposed by the Cap&Trade system proposed in legislation passed by the House of Representatives in June 2009 and stalled in the Senate ever since, the market-based plan to fight global climate change has been branded “cap-and-tax” by opponents on the left and the right.

Most Congress-watchers believe neither Cap&Trade nor any other comprehensive energy and climate bill will get through the Senate this year. Some hold out hope for a bipartisan energy and climate proposal being worked out by Senators Kerry (D-MA), Lieberman (I-CN) and Graham (R-SC). It is unclear exactly what the details of the Kerry-Lieberman-Graham (KLG) emissions-cutting plan will ultimately be. The Senators have acknowledged the potential of the Cap&Dividend concept contained in the Carbon Limits and Energy for America’s Renewal (CLEAR) Act proposed by Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) but appear to be developing a "reduction and refund" compromise concept.

Though Senator Graham has worked hard on the compromise legislation, he has – since the passage of the health insurance reform legislation – repeatedly told the media he foresees difficulty with any other business being done in the Senate until after the November elections.

Therefore, even as the new report elucidates the significant economic benefits of Cap&Dividend, its fate is anything but CLEAR.

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THE DETAILS
The goal of CLEAR, very nearly matching the Obama administration goal, is to cut U.S. GhGs 80% by 2050.

A cap on greenhouse gas emissions (GhGs) is inevitably going to impose increased costs on those who generate them, especially on those who use fossil fuels to generate electricity and sell fossil fuels to power transport. The costs will certainly be passed on to all consumers who use energy or use products that require energy to manufacture, transport and/or sell.

The only way to protect consumers from the financial burden of those increased costs is to transfer the revenues generated from the charges imposed on GhG-emitters back to the consumers. That is what a carbon tax would do, that is what the Cap&Trade system in the House bill written by Representatives Henry Waxman (D-CA) and Ed Markey (D-MA) would do and that is most emphatically what the Cantwell-Collins Cap&Dividend plan would do.

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The CLEAR act charges GhG-intensive industries per ton of emissions (“carbon shares”) and returns 75% of the revenues to the public as monthly dividends. It channels the other 25% into a Clean Energy Reinvestment Trust (CERT) Fund that will invest in New Energy and Energy Efficiency.

The emphasis is on a system that caps and prices emissions, is affordable to businesses as well as just and equitable to consumers and creates incentives and funding for a shift to a New Energy economy.

Every U.S. consumer would get the same dividend (portion of the revenues obtained from emitters). Those who consume more energy will get less relief from rising energy costs by the dividend. Those who take conservation and efficiency steps to reduce their energy consumption will be more completely compensated by the dividend and hurt less by the rising costs.

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High-income citizens tend to use more energy and will therefore likely pay more. Middle- and Low-income citizens should do better. In states where more electricity is generated by fossil fuels and where there is a need to travel longer distances by car, the latter groups may be more heavily burdened.

These income and regional sources of inequity can be compensated through the CERT fund in 2 ways: (1) A larger portion of the investment can go to regions that need to move more significantly to NE and EE, and (2) some ~9% of the total auction revenues could go to state-specific dividends that would further compensate Low- and Middle-income citizens in high-fossil fuel consuming regions in the early years of the transition, reducing the dividend portion from three-quarters to two-thirds but making the overall impact of the change more equitable.

The CLEAR Act includes strict provisions against the trading of the carbon shares and excludes any use of offsets. Both strictures are intended to simplify the system and protect it from fraud and abuse.

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The total number of carbon shares available at auction would be determined by the overall cap, which would be progressively ratcheted down. The total revenues would be divided by the entire number of U.S. citizens. Each would get an equal monthly portion. Those who conserve more effectively on things that increase in price due to the cap and its consequences (energy and energy-intensive products) would do better – or at least less worse – and those who continue their old habits would do worse.

Income and region specific provisions would help keep the system equitable, especially during transition years.

The CERT fund portion of the revenues would be administered by the Congressional appropriations process and include a wide range of NE and EE possibilities.

In 2020, Cap&Dividend could be expected to cut GhGs to 5.4 billion tons. At $25/ton (carbon share), a price within the bill’s minimum and maximum collars for 2020, the revenue that would be available as dividends and for the CERT fund would be $135 billion.

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The 2012 minimum carbon share price is $7 and the maximum carbon share price is $21. The bill allows the minimum price to increase 6.5% per year and the maximum price to increase 5.5% per year, leading to a 2020 minimum/maximum of $11.58/$32.23.

Household consumption of fossil fuels comprises ~66% of U.S. GhGs. The other third of U.S. GhGs is due to local, state, and federal government expenditure, non-profit institutions, and exports.

The dividend per person would be the same in every state but what the household pays as a result of higher fossil fuel prices differs because median incomes, home heating and cooling needs, and the carbon intensity of the state’s electricity supply all differ.

Differences across states are fairly small because total carbon use per capita is fairly similar across the country. Many of the differences have offsetting effects. Some states need more winter heating and some need more summer cooling. Some states use more coal but are typically lower income. And interstate differences will come with any program that prices emissions. Cap&Dividend, like the other programs, contains compensatory reallocation of some of the revenues it generates to make the system more equitable.

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Net benefits vary. For those with lower incomes, the net impact is invariably positive, mainly because low-income households consume less than the average amount of carbon. For those with the highest incomes, the net impact is negative because of their above-average levels of consumption.

The authors report 2 outstanding conclusions from their study. (1) The lower 70% of the U.S. population, which comprises the lower and middle classes, comes out ahead (derive a net monetary benefit beyond the benefits of ending U.S. dependence on Old Energy and cutting back GhGs) in the CLEAR Cap&Dividend system. (2) Interstate differences of impacts are much smaller than income differences. The average net benefit nationally of people in the lowest income group is $186; the average net loss of people in the highest income group is $211. That's a range of $397. State differences only range from an $11 benefit to a $101 benefit, a $90 swing.

To reiterate: Investments from the CERT Fund will likely create ~360,000 jobs nationally and can be directed to regions with higher unemployment and worse dependence on Old Energy. Many more jobs can be expected as private investment follows the trends established by CERT spending. From this, it is CLEAR: The right energy and climate bill will also be a jobs bill.

Peter Barnes wrote the book on Cap&Dividend. (click to enlarge)

QUOTES
- Frank Maisano, energy analyst, Bracewell & Giuliani: “…KGL is now referring to their bill as "reduction and refund" as opposed to "cap and trade," even though the proposal will still include a phased-in national cap and allocated allowances. The draft discussion continues to stress the need for a 17% reduction by 2020, the absolute necessity of a carbon price signal (especially to incent CCS deployment), and the fear of EPA and state action in the absence of a bill. More rumors regarding details include more focus on “Cap-and-refund” bill that returns money to consumer thru the utilities via a rebate on their electric bill, more limited trading than the House or EPW bills, a 4-year delay for manufacturers under the bill to assist with compliance, a “hard” price collar, likely between $12 and $20+ per ton but also an allowance reserve, more offshore drilling and revenue sharing, a linked fee for refiners instead of buying allowances, more nuclear loan guarantees and NRC licensing improvements and incentives for natural gas vehicles. They continue to discuss things like the Bingaman Energy bill and a new Clean Energy standard as well as effort to mitigate opposition by working with groups…”

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- From the CERI report: “The [CLEAR] Act seeks to protect the climate by capping the use of fossil fuels, so as to gradually reduce U.S. carbon emissions by 80% by the year 2050. At the same time, the Act seeks to protect family incomes by recycling three-quarters of the revenues from the sale of carbon permits directly to the public, and devoting the remaining one-quarter to job-creating investments in the clean energy transition… The CLEAR Act is a “100-75-25-0” climate policy…100% of the permits to bring fossil carbon into the U.S. economy will be auctioned — there are no permit giveaways. The bill strictly limits the buying and selling of permits to prevent carbon market speculation and profiteering…75% of the auction revenue is returned directly to the public in the form of equal dividends per person. These “energy security dividends” are paid monthly to every man, woman, and child lawfully residing in the United States…25% of the auction revenue is deposited into a Clean Energy Reinvestment Trust (CERT) Fund to be used for investments in energy efficiency, clean energy, adaptation to climate change, and assistance to sectors that face economic dislocation during the transition from the fossil-fueled economy…Zero “offsets” are allowed. Polluters cannot avoid buying permits or curbing their use of fossil fuels by paying someone else here or abroad to clean up after them…”

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- From the CERI report: “…states that use more energy for home heating costs generally use less for air conditioning. Similarly, states that have more coal intensive electricity tend to have lower median incomes, and hence lower consumption, which leads to lower carbon price impacts…It is important to note that interstate differences in the impact of higher fossil fuel prices will occur under any policy to cap carbon emissions. Interstate differences in net impacts will depend on who gets the money. The most striking feature of the results shown in Table 1 is that the net impact of CLEAR on the median household is positive in every state…This reflects the fact that U.S. household incomes are skewed (in the strict statistical sense of that term) toward upper-income groups: hence the mean (average) is greater than the median (middle). The impact of higher fossil fuel prices is proportional to consumption, so this too is skewed to the top of the distribution. Because the median household is. Nationwide, the average net benefit works out to $65 per person, or $260 for a family of four…”