Revenue-Neutral Cap and Trade

Abstract:     
Designing climate change regulation presents a dilemma. Because 32 to 40 percent of U.S. greenhouse gas emissions result from individual choices, climate change regulation must shift the significant financial incentives that both corporations and individuals now face to use carbon-based energy and to use it wastefully. Therefore, climate change regulation must increase the prices individual consumers pay for carbon-based energy. This is a hard sell politically in the midst of the worst recession since the Great Depression. Thus, opponents of cap and trade legislation in Congress have made significant headway by dubbing it “cap and tax.” Such arguments can be diffused by making a cap and trade program revenue neutral. This article discusses two forms of revenue neutral cap and trade: A “cap and dividend” approach auctions all allowances and returns the revenue to individuals on a per capita, equal shares basis. A “fair-share cap-and-trade” distributes the allowances themselves to individuals, also on a per capita, equal shares basis. Individuals can then sell their allowances to the fossil fuel producers and importers that are required to hold an allowance for each ton of CO2 embodied in the fuel they sell. Both schemes decouple the imposition of a price on carbon from the infliction of financial hardship on individual consumers and thereby diffuse the “cap-and-tax” argument. But a fair-share cap-and-trade may be superior to a cap-and-dividend approach in its capacity to reinforce the emerging social norm of carbon footprint minimization as well as a justice-based conception of climate change that views the absorptive capacity of the global atmosphere as a limited, commonly held resource to which each individual on earth has an equal claim. On the other hand, a fair-share cap-and-trade scheme would pose implementation challenges not raised by a cap-and-dividend approach.

Number of Pages in PDF File: 18

Keywords: climate change, global warming, cap and trade, regulation, environment, social norms, cap and dividend, cap and share

JEL Classification: K23, K32

Accepted Paper Series