How About a Cap-and-Trade Dividend?
Robert B. Reich
Wall Street Journal, June 4, 2008

The Lieberman-Warner cap-and-trade bill is going nowhere. Even in the unlikely event Congress passes it, President Bush has said he will veto the measure, and there aren't nearly enough votes to override. So the real action commences on Jan. 20, 2009, when a new administration takes over. Barack Obama is on record in favor of cap and trade. And so, significantly, is John McCain.

In fact, Sen. McCain has been among the strongest backers of the Lieberman-Warner bill. Last October, he said he was "bitterly disappointed" by U.S. inaction on climate change so far. "The Europeans implemented a cap-and-trade system; they stumbled and had their problems, but it is still the right thing to do," he said.

So it's a certainty that we'll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions. The "trade" part of the equation would allow companies finding efficient ways to cut emissions to sell the unused portions of their permits to others.

Sen. Obama's proposal is more ambitious than Sen. McCain's in terms of how fast the overall cap would drop. But the biggest difference between Messrs. McCain and Obama is how the permits would be allocated. Mr. McCain's proposal would initially give out most of them for free to the nation's biggest emitters of greenhouse gases. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters will face the largest challenges in cutting emissions.

By contrast, Mr. Obama has proposed allocating the permits through an auction. Under his proposal, every company -- large or small -- would have to buy the rights to emit greenhouse gases. As a result, the biggest emitters would have to pay the most -- thereby providing them with the greatest incentive to cut emissions right from the start. In economic terms, such a carbon auction is the equivalent of a carbon tax, and it makes more sense than a system that allocates permits on the basis of how much greenhouse gas a company or industry already emits. Companies and industries that impose the largest social costs in terms of such emissions should be given the greatest incentives to cut costs immediately.

Moreover, carbon auctions invite far less political maneuvering. Setting initial allocations by emissions invites every big corporation and industry to fight for the biggest possible allocation and claim the largest emissions. Despite Mr. McCain's avowed determination to reduce the influence of lobbyists in Washington, the resulting free- for-all would be a bonanza for K Street.

In fact, one likely result would be the issuance of so many permits as to break the overall cap. This is one reason why cap-and-trade hasn't worked very well in Europe so far. Since the European Union adopted the system three years ago, carbon emissions are actually up by several percentage points. The EU gave initial permits away for free, and many companies discovered clever ways to grab even more of them than their previous emissions would warrant.

Mr. McCain hasn't completely ruled out a carbon auction. In fact, the Lieberman-Warner bill he supports would auction off some permits -- at first a few, and more as time goes on. Over the life of the bill, half of the permits would be handed out for free, half by auction.

But carbon auctions raise another problem when it comes to Washington. Revenues from the auctions are likely to be fish bait to industries that might qualify for some of them. Sen. Joe Lieberman estimates that the market value of all permits under his bill would be about $7 trillion by 2050. That sum would go into what he calls a Climate Change Credit Corporation, which, operating outside the budget process, would invest in various plans for developing alternative energy. You can bet that lobbyists for ethanol, nuclear and "clean" coal are already salivating at the prospect of a similar fund emerging from a bill championed by a President McCain or President Obama.

That's why it's important that all revenues from carbon auctions be cycled back to citizens. And rather than launch another endless debate over how and to whom -- a payroll tax cut for people earning under the median wage, or a cut in capital gains? -- it would be well to agree to the simplest possible formula: Every adult citizen should receive an equal share. If the carbon auction yields $150 billion in the first year, for example, each of America's 150 million adult citizens should receive a Treasury check that year of $1,000.

Such direct and simple repayments deal with another problem. Although the balance of economic studies suggest that the cost of a cap-and-trade system will be modest, inevitably some costs will be involved and be passed along to consumers who are already walloped by high fuel and food costs and who will be in no mood to accept even modest additional price increases. Hence, the yearly dividend checks will be a welcome offset.

Our atmosphere belongs to all of us. It seems only reasonable that corporations should have to pay to use it. The citizens of Alaska and Alberta, Canada, get yearly dividends from the oil companies that take away their natural resources. Why shouldn't the same principle apply when industries use the biggest common resource of all?