Varun Sivaram

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Why Bill McKibben is wrong on cap-and-dividend

by Michael Levi
April 19, 2010

Bill McKibben has a piece in the new issue of TNR arguing that the Cantwell-Collins “cap-and-dividend” bill is vastly superior to whatever the Kerry-Graham-Lieberman effort will produce. I’m not buying it.

The case for Cantwell-Collins centers on a few simple points: The bill is only forty pages long; it doesn’t give emissions permits away for free to polluters; it excludes financial services firms like Goldman Sachs from trading those permits; and it sends the revenue from permit sales back to citizens in regular “dividend” checks.

McKibben makes a political argument and a policy one for the bill. First the political case:

The check in the mailbox will make most Americans whole – seven out of ten would come out ahead, with only real energy hogs hurting…. The Cantwell-Collins bill is the kind of legislation you could actually campaign on…. Cap-and-dividend makes sense to people – it sounds fair.

Here’s the problem: the three out of ten people who will fail to come out ahead are not simply “real energy hogs”. They are people who happen to live in states that currently generate electricity from coal, or that depend heavily on energy-intensive manufacturing for their economic base. The average consumer in such a state could easily face net costs from the bill, even if he takes modest conservation measures – and we can be sure that opponents of such legislation would not hesitate to point that out. (Not that this would be a problem for the cosponsors: Washington state generates 65% of its electricity from zero-emissions hydro; Maine is dominated by natural gas, hydro, and other renewables, with only 2.3% of its generating capacity coming from coal.

If bills passed by majority votes of the U.S. public, of course, this would be a non-issue. But they need to be passed by the Senate, where regional disparities get magnified. That’s why Waxman-Markey came up with its complicated allocation system – to make sure that more cash would get returned to parts of the country that paid more in the first place. One can argue over whether that’s fair – after all, no one sheds tears for New York on grounds of regional fairness when income taxes go up – but it’s reality.

Then there’s the policy case, which comes in many parts (many of which, despite their silliness, I’m going to ignore here). Here’s McKibben on some of the compromises likely to be found in Kerry-Lieberman-Graham:

It may come with a couple of truly costly giveaways from an environmental point of view: The EPA would be forbidden to regulate carbon, and states couldn’t do anything tougher than Washington allows.

Of course, Cantwell-Collins could end up adding those bits in order to pass a bill, and Kerry-Lieberman-Graham could end up removing them. The decision has zero to do with whether the bill is cap-and-dividend or something else.

McKibben also celebrates the fact that Cantwell-Collins eschews offsets. But then, seemingly oblivious to the connection, he goes on to say that “somehow or another, we need to make good on Hillary Clinton’s pledge to send billions of dollars to poor countries already suffering from climate change”. Well, there’s pretty much only one politically plausible way to do that: offsets.

McKibben also seems quite pleased that Goldman Sachs and its ilk get cut out of the permit trading game. But he neglects to note that, so long as emissions permits are traded (and they would indeed be traded under Cantwell-Collins), someone with some expertise has to do it. Under Cantwell-Collins, that means regulated entities; the ones with the expertise to trade permits are likely to be big oil companies (BP, for example, has a prolific trading operation that could easily expand). Perhaps he thinks that delivering rents to oil companies is more politically saleable than doing the same for big banks. I personally doubt it. If you want to cut out the rents, you either need to do a carbon tax, or you need to restrict trading in ways that will make compliance much more expensive for utilities (which is to say consumers), factories, and such.

I’m personally not so pessimistic about Kerry-Lieberman-Graham. There are actually some things about the “linked fee” that I like, and a few other bits that I’m warming to. I suspect I’ll have quite a bit to say about all that when they drop the bill next week.

Post a Comment 2 Comments

  • Posted by Robert

    You seem to be focused on the political problems facing the cap-and-dividend approach. Cap-and-trade may be easier to pass, but which approach gives the better chance of reducing CO2 emissions significantly?

    You seem to ignore the primary advantage of the dividend approach: it’s scalable. To achieve significant reductions in CO2 emissions, we will need to ratchet up the cost of carbon on a fairly regular basis, until it is much higher than the value which we start with. That will be politically much easier with a revenue-neutral approach.

    It also enables you to raise the price on carbon — which is in the end a consumption tax, and hence regressive — without hurting lower-income folks.

    While people from large states may form a portion of the three in ten not completely reimbursed by the dividend, I would think the vast majority of that group are going to be higher-income folks whose energy consumption outpaces a per-capita dividend.

  • Posted by John D. Wilson

    I saw your twitter exchange with @NobleFreshEnerg regarding the PERI report on Cantwell/Collins’ CLEAR legislation. Sounds like you don’t think their methods are defensible. Care to elaborate?

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