Cap and Dividend

A few days ago I wrote a rather short post about the EU ETS (Emissions Trading System). It was a praise of the general idea of cap and trade schemes (and the EU’s one as a good example), although I mentioned two challenges remaining: inclusion of all industrial sectors in the scheme and agreement on a global system of interlinked national cap and trade schemes. But there is one more adding proposal worth mentioning: the so called “cap and dividend”.

The “traditional” cap and trade schemes (e.g. the EU’s ETS) have one important flaw: they are rather cap-and-giveaway-and-trade. The tradeable permits to pollute are allocated on the basis of historic emissions – and in this way given away. A much more efficient way of allocation would be auctioning, without free permits (and, indeed, free pollution). Add it to the two challenges I already mentioned.

But there remains a problem (or actually two): the problems for poorer households to pay the higher bills caused by the necessity for the industry to buy rights to pollute, and a question of property rights.

The first part doesn’t need explanation. The second does. The fact is that in the case of cap-and-giveaway-and-trade the rights to pollute effectively belong to the industry. They can profit from selling their permits to others for whom the marginal benefit of owning them is higher. In this kind of schemes it looks as if air, water (and whatever else is being polluted) belongs to the industry.

In the case of cap and trade with allocation by auctioning the only difference is that the “property rights” switch to the government that gets the money from the auction period. But: isn’t it actually so that air, water, and others are social property, i.e. that they belong to all citizens? And if so – what alternatives do we have?

One possible solution of both the problem of “property” and that of higher energy bills was proposed by US-American Senators Maria Cantwell and Susan Collins in their CLEAR (Carbon Limits and Energy for America’s Renewal) Act this year (they want to reintroduce it in 2011): one may call it cap and dividend.

The key idea of this approach is that of cap and trade with auctioning with the difference in the use of the funds generated:

A cap-and-dividend policy would return the money directly to the public as equal dividends for every woman, man and child in the country.

That would be more just and politically less controversial than when government is cashing in (effectively imposing a kind of tax). It would reflect the actual property rights better. And it is unlikely to lose any of the benefits from the other two alternatives (cap-and-giveaway-and-trade and cap-and-auction-and-trade) it builds on. The only problem I see is in convincing some people (especially conservative thinking ones) that this is not socialism, but the only reasonable opportunity.



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