Despite a Democratic supermajority in Congress, and despite President Obama's campaign promise to tackle global warming, there will be no climate bill this year. The demise last week of the Kerry-Lieberman Senate bill [1] makes that official. But that may actually be a good thing: it clears the way for genuine solutions to global warming—solutions that ordinary Americans can understand and support. And remember, most Americans do want their government to tackle climate change. A recent Stanford University poll [2] found that 74 percent of the public believes climate change is human-caused, poses real threats and requires government action.
The bill that was withdrawn last week, like the Waxman-Markey bill [3] that squeaked through the House last year and similar measures dating back to a 2003 Senate bill [4] sponsored by John McCain, would have attempted to curb carbon emissions by creating a cap-and-trade market, a corporate-friendly approach to reducing greenhouse gas emissions. Under this system, a "capped" number of carbon emission permits are offered to coal, oil and gas extractors and importers, who can then sell (trade) the permits among themselves. As the volume of emissions permitted by the cap declined over time, the price of the carbon permits would rise, causing fossil-fuel energy to cost more and creating incentives to use less.
Cap-and-trade was popular inside the Beltway—some business interests and many mainstream environmental groups insisted [5] on it—but it is a total loser in the larger battle to excite and mobilize public opinion. Attacks by climate-change denialists took a toll, but the arcane nature of cap-and-trade made it hard to love, and its links to the financial industry, originally viewed as an asset, turned toxic after the housing bubble burst.
There is a better way. Virtually everyone who truly desires emissions reductions agrees that putting a (rising) price on carbon is essential. But there's another, better way to do that, one that also would deliver an economic bonus to a majority of Americans: the government should institute a fee-and-dividend system.
Like cap-and-trade, fee-and-dividend would limit emissions by building a fee for carbon emissions into the price of gasoline, coal-fired electricity and other carbon-based fuels, thereby giving consumers and businesses powerful incentives to use less. As in cap-and-trade, the fee would be imposed at the wellhead or import dock, eventually to be passed down the supply chain to consumers. But there are two critical differences.
First, fee-and-dividend would turn the proceeds of these higher energy costs over to the American public to spend as they wish, rather than to corporate emitters to fatten their bottom lines or to Washington lawmakers to lavish on pet projects. Under fee-and-dividend, each and every American would receive a monthly check, which for most people would offset [6] the higher energy prices caused by the fee.
The other difference is a bit technical but is just as key. Under a cap, the price on carbon would be murky, since it would be set in a vast trading market and determined by fluctuating factors like the economic growth rate, consumer and producer price elasticities and hedge bets by speculators. With the carbon fee, the carbon price would be set up front and its rising trajectory known in advance, allowing consumers and entrepreneurs to bank on the future value of saving energy. The price incentive to move away from carbon-emitting fossil fuels would penetrate every crevice of the economy, ensuring that few if any opportunities to reduce climate-changing emissions were left on the table.
Fee-and-dividend is superior to cap-and-trade on grounds of both political appeal and economic efficiency. Here's how James Hansen, the nation's pre-eminent climate scientist, contrasted the two approaches in an op-ed [7] in the New York Times last December:
Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country's. Instead it allows somebody else to buy a bigger SUV—because the total emissions are set by the cap. In a fee-and-dividend system, every action to reduce emissions—and to keep reducing emissions—would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas-guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world.
Hansen's example applies equally to renewable energy. Under a cap system, a wind farm, no less than his efficient auto, will lower the price for carbon emission permits, thus undermining the price incentive for other actions that would reduce emissions. In contrast, a carbon fee is immune to this effect, since individual actions have no effect on the legislated carbon price.
But can the environmental movement unite around fee-and-dividend?
For over a dozen years, since before the 1997 Kyoto climate summit, the Environmental Defense Fund, the Natural Resources Defense Council, the Pew Charitable Trust and other Big Green groups have been unshakably committed to cap-and-trade. Without bothering to consult grassroots activists or more maverick groups like Greenpeace or Friends of the Earth, Big Green anointed cap-and-trade as its climate mantra and forged a high-minded Beltway alliance [8] with corporate giants like Exelon and GM.
The idea was to "put a price on carbon," but in secret. Decision-makers at utilities and auto companies would use economic models to intuit the extent to which mandated declines in the amount of carbon emissions permitted by the cap over time would cause the prices of carbon permits (and, hence, fossil fuels) to rise, and would retool their power plants and products accordingly. But ordinary Americans, ponying up more for electricity and heat and gasoline, wouldn't know that the declining cap was driving the higher prices.
That was the plan. Alas, though cap-and-trade had functioned well in a kind of pilot program involving electric utilities and acid rain, it wasn't up to the job of transitioning the American economy from fossil fuels to energy efficiency and renewable sources. To manage that Herculean task in decades rather than centuries, the rising trajectory of fossil fuel prices must be not just steep but plainly visible to all—from the aircraft manufacturer weighing the use of costly exotic materials to raise fuel efficiency, to local officials wrestling with whether a new school should be built in town, near the bus stop and bike lane, or on the car-dependent outskirts. Millions of similar carbon-critical decisions, from the individual level of riding transit and switching light bulbs to the societal level of ensuring that those options are available, attractive and valorized, must be taken with full knowledge of those prices. A stealth price on carbon, one that's lost in the noise of fluctuating prices and general inflation, won't do the job.
The fate of the climate—and perhaps the viability of EDF, NRDC et al. as well—may now turn on the environmental lobby's willingness to embrace the alternative that has been there all along: a revenue-neutral, steadily rising carbon fee, the proceeds from which would be redistributed to Americans via equal monthly dividends—or, in a variant favored by some economists, in which the regressive and anti-jobs payroll tax is phased out [6] as carbon fee revenues ramp up.
A climate bill based on a revenue-neutral and rising carbon fee would not require a cap-and-trade market in carbon derivatives; would be transparent and hence less vulnerable to the K Street carve-outs that turned cap-and-trade bills into laughing stocks; could be imitated internationally (since carbon fees are fungible while carbon caps are not); and wouldn't require a PhD in complexity to grasp. Indeed, one such bill, America's Energy Security Trust Fund Act of 2009 [9], sponsored by Connecticut Democrat John Larson, is all of twenty-one pages, versus upwards of 1,500 for the Waxman-Markey cap-and-trade bill that squeaked through the House last year and the similar Kerry-Lieberman bill that just died in the Senate. Yet the emission reductions under the Larson bill would be two to three times as great [10] as those from Waxman-Markey.
A climate bill like the Larson bill would also honor a fundamental tenet of environmentalism: that the costs of pollution must be internalized into the price of the activities that cause it.
We can drive emissions reductions throughout the economy while protecting Americans' pocketbooks if we reframe the climate debate. Cap-and-trade is dead, and not a moment too soon. With its simplicity, its transparency and its economic rewards for everyone but die-hard polluters, fee-and-dividend could be a political winner. If environmentalists and others who care about averting climate catastrophe can unite around this approach, the public is ready to be convinced and, one hopes, mobilized. And, as two centuries of struggle for racial, labor and gender justice should have taught us, a mobilized public is essential to winning the climate battle.