How to Solve the Climate Problem
In contrast, the fee-and-dividend approach puts a rising and substantial price on carbon. I believe that the public, if honestly informed, will accept a rise in the carbon fee rate because their monthly dividend will increase correspondingly. The cap-and-trade target level for emissions (defined by the number of permits) sets a floor on emissions. Emissions cannot go lower than this floor, because the price of permits on the market would crash, bringing down fossil fuel prices and again making it more economical for profit-maximizing businesses to burn fossil fuels than to employ energy-efficiency measures and renewable energy technology.
With fee-and-dividend, in contrast, we will reach a series of points at which various carbon-free energies and carbon-saving technologies are cheaper than fossil fuels plus their fee. As time goes on, fossil fuel use will collapse, remaining coal supplies will be left in the ground, and we will have arrived at a clean energy future. And that is our objective.
A perverse effect of the cap-and-trade floor is that altruistic actions become meaningless. Say that you are concerned about your grandchildren, so you decide to buy a high-efficiency little car. That will reduce your emissions but not the country's or the world's; instead it will just allow somebody else to drive a bigger SUV. Emissions will be set by the cap, not by your actions.
Fourth, Wall Street trading of emission permits and their derivatives in the anticipated multitrillion-dollar carbon market, along with the demonstrated volatility of carbon markets, creates the danger of Wall Street failures and taxpayer-funded bailouts. In the best case, if market failures are avoided, there is the added cost of the Wall Street trading operation and the profits of insider trading.
In contrast, a simple flat fee at the mine or well, with simple long division to determine the size of the monthly dividend to all legal residents, provides no role for Wall Street. Could that be the main reason that Washington so adamantly prefers cap-and-trade? Fee-and-dividend is revenue neutral to the public, on average. Cap-and-trade is not, because we, the public, provide the profits to Wall Street and any special interests that have managed to get written into the legislation. Of course Congress will say, "We will keep the cost very low, so you will hardly notice it." The problem is, if it's too small for you to notice, then it is not having an effect. But maybe Congress doesn't really care about your grandchildren.
Hold on! Or so you must be thinking. If cap-and-trade is so bad, why do environmental organizations such as the Environmental Defense Fund and the National Resources Defense Council support it? And what about Waxman and Markey, two of the strongest supporters of the environment among all members of the House of Representatives?
I don't doubt the motives of these people and organizations, but they have been around Washington a long time. They think they can handle this problem the way they always have, by wheeling and dealing. Environmental organizations "help" Congress in the legislative process, just as the coal and oil lobbyists do. So there are lots of "good" items in the 1,400 pages of the Waxman-Markey bill, such as support for specific renewable energies. There may be more good items than bad ones--but unfortunately the net result is ineffectual change. Indeed, the bill throws money to the polluters, propping up the coal industry with tens of billions of taxpayer dollars and locking in coal emissions for decades at great expense.
Yet these organizations say, "It is a start. We will get better legislation in the future." It would surely require continued efforts for many decades, but we do not have many decades to straighten out the mess.
The beauty of the fee-and-dividend approach is that the carbon fee helps any carbon-free energy source, but it does not specify these sources; it lets the consumer choose. It does not cost the government anything. Whether it costs citizens, and how much, depends on how well they reduce their carbon footprint.
A final comment on cap-and-trade versus fee-and-dividend. Say an exogenous development occurs, for example, someone invents an inexpensive solar cell or an algae biofuel that works wonders. Any such invention will add to the 28 percent emissions reduction in the fee- and- dividend approach. But the 17 percent reduction under cap-and-trade will be unaffected, because the cap is a floor. Permit prices would fall, so energy prices would fall, but emission reductions would not go below the floor. Cap-and-trade is not a smart approach.
Contrary to the assertion by proponents of a Kyoto-style cap-and-trade agreement, cap-and-trade is not the fastest way to an international agreement. That assertion is another case of calling black "white," apparently under the assumption that the listener will accept it without thinking. A cap-and-trade agreement will be just as hard to achieve as was the Kyoto Protocol. Indeed, why should China, India, and the rest of the developing world accept a cap when their per-capita emissions are an order of magnitude less than America's or Europe's? Leaders of developing countries are making that argument more and more vocally. Even if differences are papered over to achieve a cap-and-trade agreement at upcoming international talks, the agreement is guaranteed to be ineffectual. So eventually (quickly, I hope!) it must be replaced with a more meaningful approach. Let's define one.