In a new post on his blog, Harvard economist and PPI contributor Robert Stavins surveys the dismal political landscape for cap-and-trade and finds reason to be optimistic. Acknowledging that cap-and-trade as laid out in the Waxman-Markey bill is dead, Stavins surveys the remaining alternatives.
First he looks at the increasingly likely option of a stand-alone energy bill, which as he accurately describes it lops off the best thing about Waxman-Markey (a cap-and-trade scheme) and preserves the worst (a cocktail of standards and subsidies that will do very little at high costs).
Then he takes a look at EPA regulation as mandated by the Supreme Court. Stavins argues that going that route would be “relatively ineffective and terribly costly for what is accomplished.” Moreover, it promises a political backlash, with the EPA’s enforcement becoming the embodiment of regulatory overkill that can be used by the right to defeat sensible climate policies.
But Stavins does like one alternative lurking out there: a so-called “cap-and-divided” system whose appeal lies in its populist politics. Stavins explains:
This could be done with a simple upstream cap-and-trade system in which all of the needed allowances are sold (auctioned) – not given freely – to fossil-fuel producers and importers, and a very large share – say 75% – of the revenue is rebated directly to American households through monthly checks in a progressive scheme through which all individuals receive identical payments.
Such an approach could appeal to the populist sentiments that are increasingly dominating political discourse and judgments in this mid-term election year. Such a system – which would have direct and visible positive financial consequences (i.e., rebate checks larger than energy price increases) for 80% of American households – might not only not be difficult for politicians to support, but it might actually be difficult for politicians to oppose!
Such a system has already been proposed in Congress, with Sen. Maria Cantwell’s (D-WA) Carbon Limits and Energy for America’s Renewal (CLEAR) Act. Also sponsored by Republican Sen. Susan Collins (ME), the bill has the advantage of being bipartisan as well as populist. Stavins warns that changes still need to be made. For instance, the bill restricts the creation of a broad market for CO2 allowances, making it less efficient and needlessly driving up costs. (David Roberts at Grist has a more detailed — and I must say persuasive — critique of the CLEAR Act here.)
In actuality, a cap-and-dividend system as Stavins lays it out is little different from a cap-and-trade system. The main difference is optics. Waxman-Markey has now been (unfairly) painted as an unwieldy sausage of backroom deals and industry giveaways. By calling for auction revenues to be returned to consumers, a cap-and-dividend certainly might be more palatable in a populist period.
But one thing that supporters of cap-and-dividend forget is that Waxman-Markey did not give away free allowances because the bill’s authors like industry. Rather, they did it because they needed industry to buy in. Can a bill that withholds those incentives from utilities and other affected companies actually make it through the legislative process? I have my doubts.
