Among policymakers, cap and trade (or carbon trading) is a popular solution to our climate change woes. The cap in cap and trade is the limit on greenhouse gas emissions set by individual governments (or intergovernmental bodies, like the United Nations). To keep carbon emissions below the cap, companies are allotted “carbon permits,” which allow them to emit limited amounts of carbon into the air. If a company wants to pollute more than their permit allows, they can purchase permits from other companies that haven’t used all of theirs. That’s the trade piece.
One of the major problems with cap and trade systems, however, is how carbon permits are distributed. Under what is sometimes referred to as “Cap & Giveaway systems,” permits are given free to polluters. The more a company has polluted in the past, the more permits it gets. Seriously, that’s a true story.
Offsets are another serious problem with cap and trade. Offset permits allow companies to exceed their emissions cap by paying for pollution reductions to take place outside of the capped market, often in developing countries. Offset permits are usually cheaper and less regulated than typical emissions trades and so polluters get to continue polluting as usual, postponing the necessary infrastructure changes that many advocates of cap and trade have claimed would result from the system.
So what is the alternative? How about a system that caps carbon emissions, actually makes the polluters pay, and returns the revenues back to the public? It’s called cap and dividend and was introduced as a bill in the US Senate in 2009 as the Carbon Limits and Energy Renewal (CLEAR) Act.
According to researchers at the Political Economy Research Institute (PERI), the CLEAR Act would cut emissions by 80% by 2050 and 100% of the permits would be auctioned; in other words, no trades (hence, no role for Wall Street) and no giveaways. There would also be no offsets, so the capped market would be more regulated. At the same time, the Act would protect family incomes by channeling three-quarters of the revenues back to the public and devoting the remaining 25% to job-creating investments in the clean energy transition.
Even better, low and middle-income families (who by default, tend to consume fewer fossil fuels than the rich) will reap more net benefits from this system. The chart above shows what the net impact of the CLEAR Act would be for different US income groups (by decile). It shows that the bottom 70% of Americans would reap some benefit from the Clear Act with increasingly more funds reaching the pocketbooks of the lowest deciles.
For more information on the CLEAR Act, check out PERI’s paper on CLEAR Economics.
Created by CPE Member Economist Sue Holmberg
October 2011
Sources:
Boyce, James K. and Matthew E. Riddle. 2011. “Clear Economics: State-Level Impacts of the Carbon Limits and Energy for America’s Renewal Act on Family Incomes and Jobs.” Political Economy Research Institute. http://www.peri.umass.edu/236/hash/863fdbde6e0aca8b6ee9285680676828/publication/403/
Leonard, Annie. “The Story of Cap and Trade.” http://www.storyofstuff.com/capandtrade/
