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James K. Boyce

This is the fourth installment of a five-part series on climate policy adapted from regular Triple Crisis contributor James K. Boyce’s March 31 lecture for the Climate Change Series at the University of Pittsburgh Honors College. This installment focuses on how the revenues from a carbon price will be distributed: Who gets the money? The first three installments of the series are available herehere, and here.

The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.

Who Gets the Money?

How much money are we talking about, when we put a cap on carbon emissions? What I want to share here are some “back of the envelope” calculations. Don’t take these to the bank, but they’ll give you some idea of the ballpark we’re talking about, what kinds of prices are likely to be associated with what levels of emission reduction. These are figures that trace the trajectory if we’re going to achieve an 80% cut in emissions by the year 2050.

In the first five years of the policy, if we were to have such a policy in 2015, we’d be emitting on average about 6 billion tons of carbon dioxide per year, a little bit less than in the absence of a policy. The price associated with that would probably be in the neighborhood of $15 a ton, so we’d be talking about $90 billion a year, or about $540 billion over those first six years. In the next decade, we’d be ratcheting those emissions down further to about 4.5 billion tons. To do so, the price would have to be about $30 a ton, generating a total cost to consumers and therefore a pot of money of about $135 billion a year, or $1.35 trillion over the decade. In the next decade, getting down to about 3 billion tons of carbon, we’d be raising the price to about $60 a ton, generating about $1.8 trillion over the decade. And the last decade, ratcheting down further to 1.5 billion, perhaps somewhat optimistically assuming here that the price needed would be only $120 a ton—that would assume that a lot of R&D has happened, a lot of new technologies come online, investments in public mass transit are online, etc., so you don’t have to push the price through the roof—that would generate another $1.8 trillion.

You add it up and over that 35-year period, we’re talking about something to the order of $5.5 trillion. Economists have a technical term for it—“a hell of a lot of money.” So the question is: Who owns that atmospheric parking lot and, therefore, who will get the money?

Broadly speaking, there are three possible answers:

One possible claim on that money is the fossil fuel corporations. What you could do is you could give them the money that consumers pay in higher prices. It’s kind of like what happens when OPEC reduces the supply of oil, and the price goes up. OPEC countries get more money. It’s the same kind of logic. If you give the permits to the firms for free, on the basis of some allocation formula, then those permits have to be tradable, because some firms end up being able to reduce emissions more cheaply, while to others it’s more expensive, and so they need to be able to trade permits with each other. This is where that phrase “cap and trade” comes from. Cap and trade is really “cap and giveaway and trade.” If you don’t give away the permits, there’s no need to make them tradable. Who ultimately gets those profits? Well, they’re distributed in proportion to who owns the firms, in proportion to stock ownership. What we know is that stock ownership is very unequal and it’s concentrated at the top of the wealth pyramid, so most of the returns would go to those households.

A second possibility is cap and spend. It’s kind of analogous to tax and spend—caps are like taxes, and this is cap and spend. In this case, the government doesn’t give away the permits, but auctions the permits. There’s an auction that’s held monthly or quarterly, and at that auction, only so many permits are on the table and the firms bid for the permits. If they want to bring carbon into the economy, they need to have enough permits to cover their carbon imports over the next quarter. The revenue is retained by the government, and it can be used to do various things—it can be used to increase government spending on anything you want to imagine: on public education, on environmental improvements, on foreign wars, you name it; or it could be used to cut taxes, income taxes, corporate income taxes; or it could be used to reduce the deficit. All of those are possible uses of the revenue that comes from a cap-and-spend type policy.

Asking people how they feel about this is kind of a Rorschach blot test—people look at this and they say they either hate it or they love it, depending on what they imagine the government will do with the money, and that’s where some of the remarkable cognitive dissonance in American politics comes out. In general, liberals like this because they think the government will do good things and the Republicans hate it because they think the government’s going to do bad things. In reality, liberals often don’t like what the government does with the money, and conservatives do like what it does with the money, like the war in Iraq, for example.

The third possibility is what I’m going to call “cap and dividend,” and in this case, the money gets recycled to the people on an equal per capita basis. In this case, as well, permits are auctioned, but a week later—every month or every quarter—you get your share of the money as your divided. The result of that is that it protects the purchasing power of working families.

I think, politically, the strongest sort of instrumental appeal of a cap-and-dividend policy is that it would keep working families whole. It would protect the middle class from impacts of higher fuel prices and thus build in durable support for the climate policy for the decades it will take to achieve the clean energy transition.

Triple Crisis welcomes your comments. Please share your thoughts below.

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