Cap-and-trade: The economic fairness issue

Grandfathering is Robin Hood's evil twin

Posted by Alan Durning (Guest Contributor) at 11:16 AM on 31 Jan 2008

Read more about: climate | energy | carbon trading | climate change mitigation | cap-and-dividend

Climate change is regressive. Its effects punish the least fortunate the most -- those who've contributed little to and gained little from polluting economies. But the solutions to climate change can be progressive. Done right, they can share fairly the burdens and opportunities of preventing climate disruption.

I said "can."

If poorly designed, climate policy can also be viciously regressive -- a vacuum cleaner sucking up working families' earning. That's why it's so important to get climate policy right. It's the single most important economic fairness issue facing us right now: more important than reforming payday lending, more important even than reforming health insurance. It's what every advocate for economic opportunity should be losing sleep over -- and jumping to action to help shape the solution.

Cost bite of climate pricing_375w

The most needed measure for minimizing climate disruption is a firm cap on emissions of greenhouse gases and a mechanism for putting a price on those emissions. In short, climate pricing. We need to make prices tell the truth about the climate.

Truthful pricing of carbon emissions, of course, means higher prices for fossil fuels. Higher fuel prices are regressive. They hit working families the hardest. By a lot.

The U.S. Congressional Budget Office's rigorous analysis of the different approaches to climate pricing estimates that a carbon charge steep enough to reduce greenhouse-gas emissions by 15 percent would take about 3.3 percent of low-income families' after-tax money. James Boyce and Matthew Riddle of the University of Massachusetts peg the cost to working families (PDF) even higher.

"Grandfathering" carbon-emissions permits -- giving them away to historic polluters, as many energy interests propose to do -- would write this redistribution of wealth into law. Under this version of cap-and-trade (Boyce and Riddle call it "cap-and-giveaway"), fossil fuel prices would rise. (They will rise under any firm cap; in fact, they're likely to rise even without a cap, as they have done in recent years.) Families would pay more for their energy -- and their food and other energy-intensive consumer goods. Energy companies, flush from high prices, would reap huge windfall profits. These windfalls would ultimately accrue to the shareholders of energy companies, who are mostly rich families. (This scenario already played out in Europe.)

Under cap-and-giveaway, the richest fifth of families would pay more for their energy, just like everyone else. But their stock portfolios would get so much fatter that the net effect would be an additional $1,200 a year per person, according to Boyce and Riddle.

Yep, under cap-and-giveaway, the rich get richer, and the poor get poorer. This chart from Boyce and Riddle shows roughly how much. (Unlike the previous chart, this one reflects the impacts of massive windfalls for energy company stockholders and various other side effects of cap-and-giveaway, and expresses losses and gains as shares of total household expenditures rather than income.)

Cap and Giveaway household losses gains_279 I don't know about you, but I can't abide a future like that, where the rank injustice of climate change itself is compounded by a system that takes money from working families and gives it to rich ones. It's Robin Hood in reverse. It's the New Deal's evil twin.

Think about it: cap-and-giveaway means that the orderlies in our hospitals will hand hundreds of dollars a year to the surgeons they clean up after; that farmworkers in our vineyards will hand piles of cash to the people who drink their most-expensive vintages; that the janitors in our airports will deliver annual checks to airplane owners; that retired grocery store clerks will pay the moorage fees for yacht owners.

It doesn't have to be this way, as Boyce and Riddle demonstrate. If we auction rather than give away permits to emit greenhouse gases, the public will claim for the common good the proceeds of higher energy prices. And the public can then return much of the resulting revenue to families, on an equal per person basis. Boyce and Riddle call this "cap-and-dividend"; others call it the Sky Trust. Everyone pays more for their energy; everyone gets a dividend check from the new Climate Trust Fund. A $55/ton carbon dioxide charge would yield almost $700 a year per person. It'd be like the Alaska Permanent Fund, which pays out an annual share of oil earnings to each resident of the state.

The net effect of cap-and-dividend, shown in this chart, is to take the sting out of climate pricing for low- and middle-income families. They pay more for energy, but their climate dividend covers the expense.

cap-and-dividend effect on income_375

That's not going to end poverty or reverse the widening income gaps that plague our continent. But it's a step toward climate fairness; it's enough to offset some of the unfairness of climate change itself. And it's proof that how we set climate policy matters as much as that we set climate policy.

Cap-and-dividend isn't the only way to make climate pricing fair. I'll describe another workable approach next time.

Thanks to Clark Williams-Derry, Sightline's research director, who did some of the legwork and thinking for this post.

For story: Cap-and-trade: The economic fairness issue
13 Comments | Post a Comment

pie in the sky

you are not a serious person

you will let the earth burn while you devise the perfect system never close to being implemented

prove me wrong: show me your votes

show me the votes in the Congress that you have

tell me the districts that you will win to get the necessary margin of victory

you cannot do it

my bet: you have never tried

because you are not a serious person

by ce1907 at 1:04 PM on 31 Jan 2008

ce1907,

I don't know you, but I'd wager substantial money that Alan Durning has done more to create tangible positive change in the world than you have, by several orders of magnitude.

Your sneering contempt for anyone who does not share your particular pinched brand of realpolitik does nothing to persuade anyone. Try showing some respect.

grist.org

by David Roberts at 1:20 PM on 31 Jan 2008

imagine this

you are correct, of course

I apologize to Alan, because my remarks were personal, my concerns are not personal, and I do not know Alan

But suppose that the blogosphere is full of sneering people who imagine that the only choice is between ideal policy and the corruption of Congress. Everyone who disagrees is assumed to be corrupt, or stupid. Need examples?

The bottom line is this: there Lefties, my natural allies, will doom all hopes for Left policies -- because of their personal attitudes.

Arrogance. Sanctimonious.

I am not saying Alan. I am saying all of them.

Quite simply, our children and grand children will suffer for this.

So imagine this: what Lefty in Congress would not want a 100% auction? Who does not want 80% reductions -- or more?

It will not pass.

Will not.

So do not flaunt (flaunt is the right word) your purity and devotion to justice and science and whatever

while you (the crowd, my crowd) refuse to address the essential problem: the votes.

You do not have them. You do not have a plausible plan for getting them. And you avoid the topic

instead spending your time in pure reverie

while the world burns

by ce1907 at 1:32 PM on 31 Jan 2008

Interesting Take

So ce1907 seems to believe that we should blind ourselves to insignificant details like scientific data and anecdotal warning signs, and focus exclusively on the immediately obtainable. While pragmatism can be a virtuous trait, its blind pursuit untethered from any frame of reference cannot prevent the world from burning. It only allows the drivers of destruction to continue framing the debate.

Articles like these seed the debate for change that leads to the votes in Congress. Working people everywhere are beginning to realize the drastic predicament our policies have created. As that trend snowballs, the political tide will change, and good policy just might squeeze through the chutes of Congress. Without any idea of what constitutes good policy, we're bunting, when the solutions to climate change require a swing for the fence.

by thadadkins at 3:21 PM on 31 Jan 2008

Republicans will use working class fear

to kill climate bills

by ce1907 at 4:02 PM on 31 Jan 2008

Yes,

And auctioning rather than giving away permits is precisely a way to raise some revenue with which to offer the working class some benefits alongside the costs. It's the only way to create a system that can garner broad political support. Without auctioning, what you've got is a massive regressive tax.

If Dems in Congress were pushing a massive regressive tax to fix the healthcare system, could any progressive in good conscience support the bill because they don't see votes for a better bill? Why view the political playing field as static like that? Conservatives don't.

grist.org

by David Roberts at 4:18 PM on 31 Jan 2008

Alan - I agree with almost everything

You are absolutely right about the importance of auctioning credits, and make a good point about the innate regressivity of grandfathering emitters so that they can pass prices along to customers.

However, I have one quibble. There is an underlying assumption common to the entire carbon debate that adding a price on carbon = higher cost energy. This is not necessarily so. A regulatory model that provides a financial incentive to reduce carbon emissions is, at core a financial incentive to reduce fossil fuel combustion. And reducing fossil fuel consumption per dollar of GDP is downright progressive, especially when energy prices are up so dramatically since 2000.

In some cases, this will come about directly from consumer action (e.g., if the incremental increase in fuel price convinces you to invest in a more efficient furnace, or thicker insulation, or CFLs that lower your long-term energy costs and give a nice payback on capital to boot). In other cases, this will come about indirectly (e.g., the family who suddenly finds that their food/transportation/etc. is cheaper because the people they buy from were incentivized to reduce their fuel purchase. But in all cases, less fuel use per unit of production leads to net savings across all groups. Indeed, Arizona found that the net cost of lowering GHG emissions to meet their state targets (a fairly aggressive target, at that) would be negative12.74 per ton). This is fairly typical, and for the same reason noted above: burning less fossil fuel saves money.

by Sean Casten at 4:36 PM on 31 Jan 2008

Mixed Feelings

I have mixed feelings about auctions. One of which is concerned with the mechanisms to put the money back in the hands of those who need in a timely fashion (taking money from poor people and returning it in 18 months or so is not very helpful).

But this is clearly a step in the right direction. Alan gets it. Any change must include attention to social justice and fairness to succeed.

Not just to pass Congress, but to pass Congress in a form which will not be hijacked by the giant energy sucking corporations and then succeed. CE1907 fails to understand this.

I understand the fear that we need to do something and fairly quickly. But doing the wrong thing would cause more damage, we are running out of time to backtrack.

Auctions are fine, but lets make sure the mechanism is in place to put the returns to use in a fair and timely manner (so far, we (Americans) don't have a very good record at doing this, a look at our ridiculous social welfare system is instructive.)

patrick in Beijing

by bookerly at 5:10 PM on 31 Jan 2008

false choice

100 percent auction is better

it is not one of the choices

you can try to pass something less threatening to the established order, or you can do nothing

those are your choices

argue all you want, but show me your votes

show me the votes

until you do, no one with power will take you seriously

and do not be so sure that your arguments are so brilliant that the public must accept them once they understand

people believe what they want to believe, and navigating politics means a lot more than policy.

you have to navigate a lot of established prejudices and identities

and you have to navigate a lot of myopic regional politics

but do not worry too much about the hated Lieberman bill passing. Most likely, no bill will pass

You will help to make sure

by ce1907 at 5:34 PM on 31 Jan 2008

Losers-Weiners

Poor? Half the world lives on $700/yr. In the U.S., the poverty threshold is $10,000/yr. It'd be nice to recognize it's a global problem, not because saving the world is something Americans can support unless it includes bombs, but because when asking someone to sacrifice it helps to see someone else suffering more, ya know, Schadenfreude.

Perfect by Fred Holland
http://www.youtube.com/watch?v=Al_8STEFrSY&feature=re ...

by ids at 6:23 PM on 31 Jan 2008

Comparative Economics

Dear IDS,

You are correct when you compare the poor in other countries to the US poor in terms of absolute dollars. But to speak in defense of the US poor, things are also much more expensive in the US. Start with the cost of housing. If you make $10,000 a year, there is a good chance that at least 6-8000 goes towards rent. Toss in heat and electricity, add a little for food, and you may be running a deficit (depending on where you are).

BTW, I'd love to see people (Americans) prepare a budget for someone making $10,000 a year in their locality.

Being poor sucks anywhere.

patrick in Beijing

by bookerly at 7:49 PM on 31 Jan 2008

Let's try

ce1907 raises a very good point. Since we want quick action, we may end up with something other than the best. Here are the points that I brought up with my senators:

GHG fees (aka Carbon tax) are better than Cap-and-Auction, which is much better than Cap-and-Grandfathering, which is much better than doing nothing.
Please try to bring up legislation which is the most environmental possible to a vote, so we can determine who is voting against it and bring citizen pressure to bear.
After bringing it to a vote (or as close to a vote as you can), be willing to move on Cap-and-Grandfather if that is the best you can do.
If you do need to resort to Grandfathering, try to make it phase to Auctioning as quickly as possible (4 years or less?), or make it last only 2-3 years, so we can replace it with something better soon.

bill

by bfraser at 3:34 PM on 01 Feb 2008
[ Parent ]

Bill

While motives vary

I think there are a few conceits tucked into the Lieberman bill

1. make room for Republicans on the climate change bandwagon. Make the need for action mainsteam; pull the teeth out of the worst rightwing demogoguery with the spectacle of moderate Republican supporters
(the tradeoff is some cover for some Republicans, but this is the fastest way to make climate regulation consensus -- like CWA regs on sewer waste and raw industrial waste)

create enough certainty that carbon will have some cost to establish the alternative energy industry and create economic incentives for more efficiency
Along with 2, give some space to existing businesses (to not create -- or just be blamed -- for economic collapse) with clear incentives to shift business paradigms

As you can see, the calculus is not what is the best policy, it is more what is the best that we can get immediately, and how can we encourage a suspicious business world to buy in to creating a new way of doing things

The change needed is dramatic, but we need to get there through consensus, and the consensus must be built in good faith

By the way, let me declare something surprising: I am a very, very partisan Democrat, but I do not hate Republicans

we must all hang together, or we will all hang separately

by ce1907 at 8:37 PM on 01 Feb 2008

ADVERTISING POLICY

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