The Senate is tied in knots on climate legislation. In President Obama’s view, putting an economy-wide price on carbon is the most effective way to stimulate clean energy invest­ment and jobs. Most Democrats — though not enough — agree. Roughly half a dozen Republicans, given some political cover, might go along, but the party’s leadership opposes a “national energy tax.” Sixty filibuster-proof votes are therefore not in sight. And after November, when Democrats are expected to lose seats, the prospects look even grimmer. What is to be done?

The conventional wisdom is to court Senatorial votes by giving handouts and exemptions to polluting industries. This has been the strategy pursued by Sens. John Kerry (D-Mass.), Joseph Lieberman (I-Conn.), and “pragmatic” greens until now. It hasn’t worked and isn’t likely to. The com­plex­ities are too great, and throwing people’s money at giant energy compa­nies isn’t a popular idea these days.

There is, however, another way forward. It starts with the cap-and-cash-back approach, a.k.a. cap-and-dividend, embodied in the bipartisan CLEAR Act co-sponsored by Sens. Maria Cantwell (D-Wash.) and Susan Collins (R-Maine). Their 39-page bill caps and prices all carbon emis­sions, but instead of rewarding polluters — most of whom will pass their cost of polluting to their customers — it protects the people who will ultimately pay the bills — namely, us.

The CLEAR Act requires all first sellers of carbon — fuel companies like Exxon-Mobil and Peabody Coal — to buy per­mits from the federal government. These permits are auc­tion­ed, not given away free (after all, polluters should pay), and three-quarters of the proceeds are returned as equal payments to all legal U.S. residents. This is accomplished electronic­ally every month, like Social Security. U.S. manufacturers and workers are protect­ed by carbon fees at the border.  

This straightforward system has numerous virtues. First, it’s simple, market-based, and explainable. Second, it would spur con­ser­va­tion, efficiency, and innovation through­out the economy, while keeping govern­ment out of the dicey and costly business of picking winners. Third, it’s transparent — it’s easy to see how the money flows.

Perhaps cap-and-cash-back’s greatest virtue is the pocketbook protection it affords middle class families throughout the long transition to clean energy. As carbon prices climb, so auto­ma­tic­al­ly will the cash families get back. Those with big houses, cars, and travel budgets will pay more in higher prices than they’ll get back (as they should), but roughly 70 per­cent will get back more than they pay. In other words, rather than imposing a national tax, cap-and-cash-back puts money in most Americans’ pockets.  

Despite its self-evident appeal, political insiders have dismissed the CLEAR Act because it doesn’t buy off special interests, presumably a sine qua non in Washington these days. Another criticism is that it shifts money from people in the Midwest, where util­i­ties rely mostly on coal, to people in other states whose electricity is less carbon-intensive. The mag­ni­tude of this shift is actually quite small, and it can be entirely eliminated — as Cantwell has suggest­ed — by giving all states as much money back as they pay in.  

The interesting political question is what to do with the 25 percent of auc­tion revenue that isn’t returned to the people. The sums involved aren’t chicken feed: they’d amount to hundreds of billions of dollars over 40 years. The present ver­sion of the bill puts that money in a trust fund dedicated to an assortment of climate-friendly purposes. But other uses of this revenue might give the bill more traction while preserving its core virtue — installing a rising price on carbon in a simple, transparent and popular, hence durable, way.

What if, for example, that 25 percent was allocated to two grand public purposes: grants to states for job creation and federal deficit reduction? The proportions could change over time, with more job creation in the early years and more deficit reduction down the road. Such a clean-energy-plus-jobs-plus-deficit-reduction package might entice fence-sitters on both sides of the aisle. And because it’s short and simple, it could be offered as an amendment to another bill that comes to the floor this year.     

Pulling this off would require, of course, presidential leadership; Obama would have to push the plan to senators and explain it forcefully to the American people. The latter task, fortunately, plays to his strength. And even in today’s acrimonious political climate, it would be hard for voters — and, one presumes, their senators — to resist a bipartisan policy that creates jobs, reduces our financial and ecological debts, and pays hard cash to everyone.

As U.S. climate legislation creeps forward, Senators now have two frameworks to choose from.  One is from Sens. John Kerry (D-Mass.), Joseph Lieberman (I-Conn.) and Lindsey Graham (R-S.C.); the other is from Sens. Maria Cantwell (D-Wash.) and Susan Collins (R-Maine).  Both begin with descending carbon caps that, along with supplementary policies, promise to reduce carbon dioxide emissions at roughly the same rate, and both protect domestic industries by imposing fees on carbon-intensive imports from countries that don’t limit emissions. But from there the two approaches diverge markedly.

The Kerry-Lieberman-Graham framework is based on the Waxman-Markey bill that narrowly passed the House. It would create a complex and opaque cap-and-trade system riddled with favors for utilities and Wall Street. Roughly 85 percent of the initial carbon permits would be handed free to utilities and other entities, which could sell them for cash. In theory, utilities would return much of this cash to their customers, but exactly how they would do this, along with all the monitoring and enforcement, is left to the 50 states.

Kerry-Lieberman-Graham would also create a worldwide trading system for carbon “offsets” and other carbon-based securities. Offsets are different from government-issued permits or allowances. They are assertions by private parties, often in foreign lands, that they will sequester or avoid emitting a quantity of carbon dioxide that otherwise would wind up in the atmosphere. Such claims are conjectural at best and potentially fraudulent at worst. They played no part whatsoever in the successful cap-and-trade system for sulfur dioxide, and are just as unnecessary for carbon dioxide. Indeed, they would seriously weaken a carbon cap by allowing polluters to continue polluting despite the cap — just pay someone, somewhere, not to cut down trees, and you can burn carbon as in the good old days. For that reason offsets are avidly sought by polluters, who want to buy them, and by Wall Street firms, who see a large market for selling them. Kerry-Lieberman-Graham would create a copious supply of offsets (up to 2 billion tons a year), along with complex rules for regulating them.

By contrast, Cantwell and Collins would establish a simple, transparent cap-and-dividend system that returns higher carbon prices directly to consumers and allows only minimal carbon trading. It would cap fossil fuel suppliers like Exxon-Mobil and Peabody Coal, rather than emitters like utilities and steel plants, because it’s much easier to catch carbon when it enters our economy than when it leaves. It would auction all carbon permits and avoid giveaways, market distortions and offsets. And it would put a ‘collar’ on the price of carbon permits in order to limit market volatility.

Revenue from Cantwell and Collins’ auctions would be split two ways: 75 percent would be returned to the American people to compensate for higher energy prices, and 25 percent would be used for transition assistance and public investments, subject to annual appropriations.

Merits

The arguments for and against each framework can be divided into two categories: merits and politics.

On the merits, the nod goes to Cantwell-Collins by a comfortable margin. Its foremost advantage is simplicity: it’s less than 50 pages long (compared to about 1,500 for Kerry-Lieberman-Graham), it’s much easier than Kerry-Lieberman-Graham to understand, and would be far simpler to administer. For example, it requires no monitoring of smokestacks or verification of offsets in distant lands.

Another virtue of Cantwell-Collins is its transparency. Its permit auctions are competitive and open, and the public can readily see where all the revenue goes: 75 percent to everyone equally and 25 percent to climate-related programs. Moreover, because offsets are not allowed, financial shell games are virtually impossible. By contrast, it’s virtually impossible to tell where the money will go under Kerry-Lieberman-Graham, and financial shell games are as certain as oversized Wall Street bonuses.

A third advantage of Cantwell-Collins is its dividends. These guarantee that middle class families won’t be screwed. Indeed, a majority of households in all states will come out ahead because their dividends will exceed their higher carbon costs. This will sustain consumer spending and spur our ailing economy. It will also retain popular support for a declining cap as carbon prices rise over time.

Kerry-Lieberman-Graham does promise to return some money to consumers through savings on utility bills, but such returns will vary widely from utility to utility and will be largely unnoticed by ratepayers. Moreover, the returns won’t cover higher prices at the gas pump or the indirect costs of carbon in food and other products.  And, since the returns will come in the form of lower energy bills, they’ll defeat the whole point of putting a price on carbon — to spur energy users to conserve.

Politics

Merits notwithstanding, getting 60 votes is what counts in Washington these days, and Kerry-Lieberman-Graham backers are quick to dismiss Cantwell-Collins as a political non-starter. I’m not so sure.

There are 40+ solid votes for carbon capping in almost any form; the remaining votes needed for passage must come from about a dozen centrist Democrats (most of whom represent coal-dependent states) and half a dozen moderate Republicans. Kerry, Lieberman and Graham seek to win these votes by adding to the Waxman-Markey giveaways further incentives for nuclear power, offshore oil drilling, and so-called clean coal. That certainly is one way to go, but not the only way. It also risks losing environmental support if it goes too far.

Cantwell and Collins’ appeal to moderates is based first of all on their bill’s merits. Believe it or not, there are Senators on both sides of the aisle who prefer policies that can be explained to constituents in a few sentences to Rube Goldberg schemes that can’t be explained at all. There also are Senators who would rather not help Wall Street concoct another financial bubble.

Then there are the dividends. Conservatives have derided cap-and-trade as a middle class tax hike — which, effectively, it is. But dividends flip that around — they turn an erstwhile tax into a recurring and highly visible benefit to average families that is potentially as popular as Social Security. With elections coming in 2010, that’s not a bad political move.

The strongest political argument against Cantwell-Collins is that it favors coastal states, which generate more of their electricity from hydro, nuclear, and natural gas, over Midwestern states, which rely more on coal. Those disparities exist, but are much smaller than alleged: a majority of families in all states come out ahead under Cantwell-Collins. In addition, regional disparities can be tempered with money from the 25 percent public investment pot.

The wild card in all this is President Obama. Up till now, he’s been supportive of Waxman-Markey and its offshoot because that has been the only game in town. But now that there’s a bipartisan alternative, a post-Copenhagen Obama could play a different role. Cantwell-Collins is essentially the policy Obama campaigned on — it auctions 100 percent of pollution permits and protects middle class families by returning higher carbon prices directly to them. If health care reform passes and Obama gets his mojo back, he just might push climate policy in the right direction.

As this is written, two House Committees — Energy and Commerce and Ways and Means — are considering climate legislation.  Both are following similar timetables, and hope to report bills by June.  

In the case of Energy and Commerce, chairman Henry Waxman has released a 648-page discussion draft.  The draft creates a large and complex carbon trading system but is silent on two key questions — whether initial permits will be auctioned or given free to polluters, and how revenue from permit auctions, if any, will be used.  Despite the silence on these questions, however, it is widely expected that the bill will give over half the initial permits to various industries for free, much as the European Union has done. 

By contrast, in Ways and Means, several short and simple bills — some involving a carbon tax, and others involving a cap with 100% auctions — are being considered.  All the Ways and Means bills have the same framework: they raise the price of carbon economy-wide and return the money to the people, thereby protecting families from the impact of higher prices.  In some bills the revenue is returned through tax reductions.  In Rep. Chris Van Hollen’s bill, it is returned through monthly per capita dividends.   

This post is not about the merits of either committee’s approach.  It’s about allowing both committees to complete their work and present to the full House a choice of frameworks for pricing carbon.  
 
At the moment, there is heavy pressure from many quarters to abort the Ways and Means Committee’s work.  The party line is that two bills would be a distraction, and that everyone needs to get behind the Waxman bill, whatever it turns out to be.  
 
In my view, this ‘my way or the highway’ approach is ill-advised.  It is too soon to shut down a wider discussion of carbon pricing, and too soon to eliminate alternatives.  The time will come when that discussion must end and a choice must be made, but that time is not yet.
 
Why do I believe this?  Putting a price on carbon (or as I would prefer to say, on air) is a BIG DEAL, comparable in magnitude to Social Security.  It has monetary impact in the trillions, a huge impact on families, and is something we’ll have to live with for 40+ years.  It’s important that the way we price air/carbon is not a shotgun marriage, but a marriage entered into with public understanding and consent. The purpose of having two bills and debating them is to foster that understanding and consent.
 
The approaches being considered by the two committees are significantly different.  One would create a complex, opaque system that favors politically powerful corporations, the other would create a simple, transparent system that returns higher prices directly to the people.  It is a GOOD THING for Congress and the public to know that these two approaches are possible, and to discuss them for a while. Snuffing out that discussion before it happens would be a disservice to the democratic process, and ultimately to finding a durable climate solution.
         
Moreover, putting all our climate eggs in one basket is risky.  If that basket breaks, as well it might, we’ll have to go back to square one, and we’ll have lost much valuable time.  It’s therefore prudent to offer more than one way forward.  What the Ways and Means Committee is doing is developing a second way to price carbon and putting it out for public view.  That is a service for which they should be praised, not condemned.  

America’s electric utilities (PDF) are waging a no-holds-barred campaign to get 40% of carbon emission permits allocated free to local distribution companies and merchant coal generators. They argue that free allocation will protect consumers better than auctions and cash back. Just give us free permits, they say, and we’ll pass through the savings to our customers.

Sounds appealing. But beware: this is not what happened in Europe. There, utilities got free permits and raised rates anyway, earning billions in windfall profits. See the study by the Energy Research Center of the Netherlands (PDF), which found that a significant part of the value of freely allocated pollution permits resulted in higher electricity prices for consumers and windfall profits for power producers.

And be aware that to get a different outcome in America, 50 state public utility commissions, which regulate over 3,000 local distribution companies, will have to perform with exceptional vigor. Don’t hold your breath.

Also recognize that, even if utilities do pass through the value of free permits by not raising electricity rates, that defeats the purpose of a pollution cap. The purpose of a pollution cap, let’s remember, is to send a price signal that spurs conservation and innovation throughout the economy. To send that signal, the cap must actually raise prices. Without higher prices, we just keep burning cheap, polluting coal.

And here’s another fact: electricity accounts for only about 25% of the average household’s carbon use — the rest comes from gasoline and the carbon embedded in a multitude of products. Giving free permits to utilities does nothing to protect families from price increases outside the electricity sector. Indeed, it may actually raise prices outside the electricity sector and simply shift the economic pain around. That’s because, as economist Dallas Burtraw recently told the House Ways and Means Committee, “The protection of one sector of the economy from changing prices means greater emission reductions must be achieved in other sectors. This raises the cost of using other fuels even further.”

A favorite utility argument is that cash rebates or tax credits don’t address the disproportionate hikes in electricity prices that consumers in coal-dependent states will face, an alleged inequity that only utility-based relief can remedy. But this claim is muted by the relatively even distribution of non-electric energy costs, and the likelihood that these costs will rise faster if electricity is shielded.

Moreover, there are better ways to address regional differences than by giving free permits to utilities. For example, transition assistance could be focused on coal-dependent states, or residents in such states could receive more cash back.

In short:

• Giving free permits to utilities prolongs the burning of coal and delays the deployment of clean alternatives. Along with so-called “carbon offsets,” it makes scientifically driven pre-2020 emission reductions unlikely.
• For purposes of both efficiency and fairness, the price of carbon should be uniform throughout the economy. We shouldn’t favor one sector — much less the dirtiest one — over others.
• If we want to protect consumers, the best way is to raise prices first, then return the higher prices to consumers directly.

What’s most disturbing about the utilities’ campaign isn’t that they’re waging it — that’s what you’d expect them to do — but that the opposition has been so feeble. Barack Obama during the presidential campaign came out for auctioning 100% of pollution permits, and recently his budget director, Peter Orszag, declared, “If you don’t auction the permits it would represent the largest corporate welfare program that has ever been enacted in the history of the United States.” Obama’s budget calls for auctioning 100% of permits and returning most of the revenue to consumers through tax credits. But now the White House seems to be waffling on auctions, and the silence on Capitol Hill has been stunning.

So we may be heading for yet another giveaway of public wealth to private corporations — first banks, then auto companies, now utilities. The irony is that utilities aren’t failing and won’t be hurt by a carbon cap with auctions — they’ll surely pass permit costs through to customers. What we’re seeing here is simply a well-organized interest group trying to draw cash from the public till, and almost no one in Washington minding the store.

Finding the new driver of our economy is going to be critical. There’s no better driver that pervades all aspects of our economy than a new energy economy … That’s going to be my No. 1 priority when I get into office.

That’s exactly the right choice for numerous economic, geopolitical, and ecological reasons. By spawning “a new energy economy,” Obama can create millions of new jobs, decrease our dependence on foreign oil and avert catastrophic climate change. But the politics of launching that new energy economy — even with enlarged majorities in Congress — remains challenging.

In facing this challenge, Obama will be constrained both by a gargantuan budget deficit and his campaign vow not to raise taxes on anyone making under $250,000 a year. And because of the recession, he can’t suck buying power out of the economy. On the contrary, he needs to stimulate spending by consumers.

He also faces a tight international timetable: in December 2009, the nations of the world will assemble in Copenhagen to negotiate a successor to the Kyoto Protocol. If Obama is to have any credibility in those negotiations, he must pass significant legislation before then.

How, then, can he fulfill his No. 1 priority?

There are many opinions about what should be part of a comprehensive energy policy, but the centerpiece nearly everyone agrees on — the great lever that will tip the whole economy toward clean energy — is a strong, descending cap on carbon emissions. If done correctly, such a cap will raise the price of polluting, spur innovation and conservation, and shift billions of dollars of private investment into new technologies for the next 40 years. But designing the cap correctly is critical; a half-baked, loophole-ridden and overly complex system will do more harm than good. The devil is in the details — and, of course, in the politics.

The most critical details involve where to place the cap and what to do with the permits the cap will create. The simplest and most effective place to put the cap is upstream — that is, on the small number of companies that bring carbon into the economy. An upstream cap could be administered without monitoring smokestacks, without a large bureaucracy, and without favoring some companies over others. It would work for the obvious reason that, if carbon doesn’t come into the economy, it can’t go out.

The declining number of permits that would be issued under the cap should then be auctioned rather than given away free — all polluters would pay, and there’d be no politically chosen winners or windfall profits. Fortunately, Obama pledged during the campaign to do just this. But that leads to another crucial detail: what to do with the auction revenue, which over time will total trillions of dollars?

There are two possibilities: spend the money on a variety of energy-related programs, or give the money back to the people. While there’s broad agreement that some public spending is necessary to solve the climate crisis, it’s by no means clear that permit revenues should be used for that purpose. The reason is that permit revenues, though initially paid by energy companies, are ultimately paid by consumers in the form of higher energy prices. They are, in effect, a sales tax on carbon — a tax that will fall on millions of Americans earning under $250,000 a year, and that will rise as the cap tightens.

Obama’s best choice is to fund energy-related programs from other sources (including long-term debt) and return all the carbon revenue to the people. This can be done through yearly tax credits, or better yet through monthly cash dividends wired like Social Security payments to people’s bank accounts or debit cards. The advantage of cash dividends is that they’d tangibly and frequently remind people that higher carbon prices are coming back to them — and help them pay mortgages and other bills that fall due on a monthly basis. The whole system might then be called “cap-and-dividend” or “cap and cash back.”

Like Social Security benefits, carbon dividends would be taxed as ordinary income; the government would then recoup about 25% of the revenue and could use that money as it sees fit. More importantly, ordinary families would get the lion’s share of the auction revenue, and get it in a way that rewards conservation. Since everyone would get the same amount back, those who use the most carbon would lose and those who use the least would gain — their dividends would exceed what they pay in higher prices. Low-income families in particular would gain because they use less energy than others and would pay little or no taxes on their dividends. In addition, the overall economy would benefit from this periodic replenishment of consumer demand.

The most persuasive argument for cap-and-dividend, though, isn’t economic but political. As the presidential campaign revealed, energy prices are an explosive issue. A carbon cap will raise fuel prices not just once, but for years to come. The potential for backlash — for frenzied cries of “Drill, baby, drill!” — is never-ending. If America is to reduce carbon emissions to the level scientists say is necessary, it’s crucial that families’ pocketbooks be protected for the duration. Cap-and-dividend does this by permanently linking dividends to carbon prices. As carbon prices rise, so — automatically — do dividends. If voters scream about rising fuel prices, as they surely will, politicians can truthfully say, “How you fare is up to you. If you guzzle, you lose; if you conserve, you gain.”

Moreover, for a carbon cap to endure, it must have broad bipartisan support. A revenue-neutral cap is far more likely to garner Republican support than one that’s linked to a large increase in government spending. Consider, for example, Senator Bob Corker of Tennessee, who supports a declining cap on carbon but not a spending bill that earmarks trillions of dollars over 40 years. Though it’s not glaringly evident, there are more Republicans like him. This doesn’t mean Obama shouldn’t spend public money on energy; it means he should separate such spending from the cap.

The ultimate reason for paying equal dividends from carbon revenue may be this: it fits Obama’s vision of how government ought to work. In this vision, the government’s job is to serve ordinary people, not special interests. It is to be fair and transparent. And it is to unite rather than divide us, to move us from a “you’re on your own” society to one in which “we’re all in this together.”

Cap-and-dividend fits this vision perfectly. It curbs carbon emissions in a way that’s simple to understand and administer, favors no special interests, and provides a degree of security to all. It treats all Americans as co-owners of the air and allocates trillions of dollars in a completely transparent way. It would be a signature Obama policy, one that sets the tone for his whole administration and remains as memorably linked to him as Social Security is to Roosevelt.

How might Obama introduce cap-and-dividend to the nation?

This plan is simple, fair and market-based. It’s not a tax, and it requires no large bureaucracy. It says to all businesses that rely on carbon emissions: start reinventing yourselves now. And it says to all families: we will solve the climate crisis together.

I appeal to the entrepreneurs and workers of America: we can do this — yes, we can. I appeal to the families of America: we can do this — yes, we can. And I appeal to all nations around the world: let us race to the top to avert planetary catastrophe, not race to the bottom to avoid meaningful action.

If, in 2009, President Obama secures a durable domestic carbon cap and a ratifiable treaty in Copenhagen, he’ll be well on his way to reviving our economy and healing our planet. We should do all in our power to help.

—–

Peter Barnes is an entrepreneur and writer whose books include Who Owns The Sky? and Climate Solutions: A Citizen’s Guide.

Let’s be clear what Lieberman-Warner was. Yes, it contained a carbon cap. But mostly it was about spending or giving away trillions of dollars. It was, as Sen. Bob Corker (R-Tenn.) put it, “the mother and father of all earmarks,” and every lobbyist in town was at the trough.

The bill sought to allocate a vast sum of money over 40 years — the exact amount is unknowable because it depends on future prices of securities (tradable carbon permits) that don’t yet exist. For each year between 2012 and 2050, the bill set the number of permits that would be issued, specified the percentages that would be given free to various entities or auctioned, and then divvied up the auction revenue in a similar manner. The result was a 492-page monstrosity that only a handful of Hill staffers and lobbyists fully understood. The rhyme or reason behind the various percentages, to the extent that there was any, was the need to garner 60 votes in the Senate. Barely mentioned in the frenzy was that the tab for all this largesse would be paid by consumers in the form of higher energy prices.

There’s another way to go: get a revenue-neutral carbon cap first and adopt other programs later. Such a stripped-down cap could be passed in the first 100 days of an Obama or McCain administration with bipartisan support. It would send a much-needed signal to markets, and show the rest of the world that the U.S. is serious about tackling climate change. The new president could then engage fully in the negotiations for a post-Kyoto treaty that are set to culminate in December 2009. And starting in 2010, we could fill in domestic policy gaps.

A revenue-neutral cap would cover all carbon entering the economy, auction all permits, and return the proceeds to every American equally, ideally as monthly dividends. To minimize overhead, dividends could be wired to people’s debit cards or bank accounts. Such a system would be simple, fair, and doable, and it would accomplish quite a lot.

Every American would understand this plan, and their dividends would cushion the higher energy prices they’d face. As carbon prices rise, so — automatically — would dividends. Families that conserve energy could come out ahead: The money they get back could exceed the higher prices they pay. This would make every family a partner in the effort to fight climate change.

To be sure, we’ll need public money to fight climate change. But some of that money can come from shifting current expenditures, and if we need more, we can raise and allocate it later. What we must do now is build the domestic and international frameworks for cutting carbon emissions. Once those frameworks are in place, much else will follow.

The Lieberman-Warner exercise will not have been wasted if it reminds us of three common-sense precepts:

1. Put first things first.
2. Keep it simple.
3. Don’t take money from people unless we absolutely have to.

If we keep these lessons in mind, 2009 could be a very good year.

—–

Stabilizing concentrations of greenhouse gases in the Earth’s atmosphere at a level that will fulfill the mandate of the UN Framework Concentration on Climate Change to avoid “dangerous anthropogenic interference with the climate system” will require drastic departures from business as usual. Here we introduce one attractive response to this challenge that may seem visionary or idealistic today but that could well become realistic once we reach a tipping point regarding climate change that opens a window of opportunity for embracing major changes.

No silver bullet exists capable of solving the complex and interdependent problems of climate change, sustainability, and economic development. A consensus is emerging, however, that solving these problems will require major changes in existing governance arrangements to eliminate or at least alleviate what the 2006 Stern Review (1) calls the “greatest and widest-ranging market failure ever seen” — the failure of the market to send proper signals about the real costs of using the atmosphere as a repository for greenhouse gases. This case exhibits the defining features of market failures surrounding open-access resources (2-6). Because emitters allowed to use the atmospheric commons as a repository for the wastes associated with burning fossil fuels at no cost, they have every incentive to use as much of this free factor of production as possible. But the present and future costs to society of this practice are enormous. Estimates of these costs vary. But there is compelling evidence that the eventual costs will exceed the cost of changing our current practices to limit emissions of greenhouse gases by a large margin (1).

Analysts have proposed a variety of forms of carbon taxes and cap-and-trade systems as policy measures to deal with this problem (7, 8). A few measures, like the European Emission Trading Scheme, have been implemented to some degree. But the measures under consideration at present are deeply flawed. In this article, we present an alternative system that has several attractive features, including the capacity to deal fairly with the regressive nature of most carbon taxing systems, to protect the new governance arrangements from political manipulation or corruption, and to contribute to the alleviation of global poverty. Working out the details of the general plan will be an ambitious task, but we think it is important to take the first step and propose a broad strategy having the six principles laid out below.

The core of this system is the idea of a common asset trust (9, 10). Trusts are widely-used and well-developed legal mechanisms designed to protect and manage assets on behalf of specific beneficiaries (11). Extending this idea to the management and protection of a global commons, such as the atmosphere, whose owners/beneficiaries include all people alive today as well as future generations, is a new but straightforward extension of this idea. Because the atmosphere is global, the Earth Atmospheric Trust would be global in scope. Initial implementation at a regional or national scale may be necessary and appropriate, however, as we build toward a global system. We cannot examine in detail the path that implementation of the system might take, or how the many institutional, political, and administrative details would be addressed. Our purpose here is to present an integrative idea that has many positive features as the basis for further discussion in the post-Kyoto world.

The trust arrangement we envision has six basic features together with four special features and precautionary measures.

Basic features:

1. Create a global cap-and-trade system for all greenhouse gas emissions (12). Although either a cap-and-trade system or a tax system could work, we believe a cap-and-trade system is preferable to a tax for this purpose, because the major goal is to cap and reduce the quantity of emissions in a predictable way. Caps set quantity and allow price to vary; taxes set price and allow quantity to vary.
2. Auction off all emission permits — and allow trading among permit holders. This is essential in order to send the right price signals to emitters. An “upstream” auction at the point of entry of greenhouse gases into the economy would require only a relatively small number of agents to participate in the auction, a fact that would facilitate the administration of such a system.
3. Reduce the cap over time to stabilize concentrations of greenhouse gases in the atmosphere at a level equivalent to 450 ppm of carbon dioxide (or lower) as recommended in the Stern review (Figure 1). The price of permits will probably go up and total revenues will likely increase as the cap is reduced (see below).
4. Deposit all the revenues into an Earth Atmospheric Trust, administered by trustees serving long terms and provided with a clear mandate to protect the asset (the Earth’s climate system and atmosphere) for the benefit of current and future generations. The trust would be a separate, non-governmental organization similar in structure to the Alaska Permanent Fund or the Alberta Heritage Savings and Trust Fund (13).
5. Return a fraction of the revenues derived from auctioning permits to all people on Earth in the form of an annual per capita payment. This dividend will be insignificant to the rich — smaller than their per capita contribution to the fund — but will be enough to be of real benefit to many of the world’s poor people. At the current annual rate of global emissions of 45 Gigatons CO2 equivalent (Figure 1) and an auction price of $20-$80/ton (14), the Trust’s total annual revenues would be $0.9 to $3.6 trillion. If half the revenues were returned equally to all 6.3 billion current inhabitants of the Earth, the payment would amount to $71- $285/capita/yr. Payments into the fund for the typical US resident producing 20 tons of CO2 equivalent per year would be $400-$1,600.
6. Use the remainder of the revenues to enhance and restore the atmospheric asset, to encourage both social and technological innovations, and to administer the Trust. These funds could be used to fund renewable energy projects, research and development on new energy sources, payments for ecosystem services such as carbon sequestration, etc. If half the revenues were used for this purpose, this would amount to $400-$1,600 billion per year initially. Transaction and administrative costs would consume a small fraction of this.

Special features and precautionary measures:

1. Do not allow revenues to go into the general fund of any government. The revenues would all go into a new, independent Trust organization with an exclusive mandate to manage the atmospheric commons for the benefit of current and future generations.
2. Appoint trustees based on their understanding of the purposes and details of the Trust and dedication to the goals of the Trust, not their political affiliations, geographic origins, or other criteria.
3. Make all operations and transactions of the Earth Atmospheric Trust transparent by posting them in an open access format on the internet.
4. Make trustees accountable for their actions and decisions and subject to removal if they fail to mange the Trust to serve the needs of all the beneficiaries.

No system is perfect. A system designed on these general principles would be able, however, to achieve a global emissions cap capable of keeping CO2 concentrations at 450 ppm or less. It would be fair; it would be efficient and relatively immune to political manipulation, and it would help to alleviate global poverty. Both Jonathan Alter in Newsweek (15) and Robert Reich, former Secretary of Labor under Bill Clinton (16) have recently advocated the idea.

Could such a system ever be brought into being? The Alaska Permanent Fund (13) is a similar arrangement on a smaller scale that has been in operation for 30 years. Creating an Earth Atmospheric Trust, however, would obviously require overcoming huge political, administrative, and institutional barriers. While not diminishing the magnitude of these challenges, we believe that it is at least imaginable that such a system could be implemented, especially once we reach a tipping point regarding responses to climate change. The political will to make the necessary changes is increasing rapidly (17). Implementing the proposed Trust would obviously require a global political agreement — a successor to the Kyoto protocol — most likely negotiated under UN auspices.

Many details would need to be worked out in the international negotiations as well as over time to make the proposed Trust effective. Here we can only sketch the idea as a starting point and vision. Below we touch briefly on four important issues that would be among those to be resolved.

(1) Price dynamics. The price dynamics following the creation of the Trust would be something like the following (1, 8). The initial cap on emissions should be something close to current emissions, and the cap could then follow the trajectory shown in Figure 1 for the 450 ppm scenario. The initial auction price would probably be in the $20-$80/ton range (1). As the cap is reduced, two counterbalancing effects will come into play. First, the increasingly limited supply of permits will cause upward pressure on the price of permits. Second, the rising price of carbon-intensive goods and services will cause technological shifts toward less carbon-intensive goods and services, an overall lowering of emissions, and downward pressure on prices. In addition, the Trust can use part of its revenues for targeted investments in renewable energy and other technologies that reduce greenhouse gas emissions. It is hard to tell which of these forces would predominate. Our expectation is that prices would increase over time, but not as rapidly as one might expect due to supply constraints alone given the counterbalancing effects of induced technological change and targeted investment.

(2) The refund delivery mechanism. Is there a practical way to distribute small amounts of money to every person on the planet, without going through national governments? Such a mechanism would have to (a) have low transaction costs, (b) be relatively immune to fraud, and (c) have global reach. Ideally, it could be done electronically, with people everywhere being able to transfer funds from a global account to a local one. An obvious problem here is that billions of poor people do not have access to banks, much less electronic transfers. One possibility is to allow ‘unbanked’ people to receive their dividends through a micro-credit system. The global Trust would work through entities like the Grameen Bank; where such entities do not exist, it would help start or spread them. In order to receive their dividends, residents would have to join a micro-credit group. All members of the group would pool their dividends to create a loan fund that would supplement the banks’ funds to be used for scholarships for local kids, etc. This would yield a double dividend: building community as well as individual wealth.

(3) The per capita formula. A straight per capita redistribution formula is the simplest, but it may not be the fairest or even the most politically satisfying. One possibility is to adjust the per capita distribution formula to account for past emissions. Thus, every person’s base dividend, calculated on a per capita basis, would be adjusted by a factor representing his/her country’s historic per capita carbon emissions. A U.S. citizen’s dividend would then be reduced substantially, while an African’s would be multiplied. While this might reduce the appeal of the plan within some wealthy countries like the U.S., most Americans would probably be willing to forego $40 or so if they knew it was being used efficiently to reduce poverty elsewhere.

(4) Who buys the permits? The simplest approach here is to require permits at the point carbon is introduced to the economy. Fossil fuel producers would have to buy permits for production at all mine-mouths and well-heads equal to the carbon content of the fuels they take out of the ground. Land owners would be required to buy permits for land clearing, burning, or other carbon or other greenhouse gas releasing activities (they may also get credits for sequestering carbon). These agents would pass on the cost of buying permits to consumers, adding them to the price of fossil energy and other carbon- intensive activities, thereby making non-carbon-intensive activities more attractive and generating incentives for rapid shifts toward low-carbon alternatives. The big advantage here is simplicity: a relatively small number of agents would have to buy permits and be monitored. While rich countries will always be able to buy more carbon fuel than poor countries — an emission trading system can’t change that — the proposed system would require rich people to pay poor people for the right to emit carbon into the global commons. This transfer would both encourage rich people to use less and allow poor people to get enough.

We encourage those interested in adding their name to a growing list of supporters of this idea to visit this website.

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References and Notes:

1. Stern review on the economics of climate change, 2006.
2. Ostrom, E. 1990. Governing the commons: the evolution of institutions for collective action. Cambridge University Press, Cambridge, UK
3. Ludwig, D., R. Hilborn, and C. Walters. 1993. Uncertainty, resource exploitation and conservation. Science 260:5104
4. Costanza, R., B. Low, E. Ostrom, and J. Wilson (eds). 2001. Institutions, Ecosystems, and Sustainability. Lewis/CRC Press, Boca Raton, FL
5. Dietz, T., E. Ostrom, and P. Stern. 2003. The Struggle to Govern the Commons Science. 302: 1907-12.
6. National Research Council. 2002. The Drama of the Commons. Washington, D.C.: National Academies Press
7. Helmut Breitmeier, Oran R. Young, and Michael Zürn, Analyzing International Environmental Regimes: From Case Study to Database. MIT Press 2006
8. S. Paltsev, J. M. Reilly, H. D. Jacoby, A. C. Gurgel, G.E. Metcalf, A. P. Sokolov and J.F. Holak 2007. Assessment of U.S. Cap-and-Trade Proposals (PDF). MIT Joint Program on the Science and Policy of Global Change. Report No. 146.
9. Barnes, P. 2003. Who owns the sky?: our common assets and the future of capitalism. Island Press, Washington, DC.
10. Barnes, P. 2006. Capitalism 3.0: a guide to reclaiming the commons. Berrett-Koehler, New York.
11. Souder J. A. and S. K. Fairfax. 1996. State Trust Lands: History, Management and Sustainable Use. Lawrence, KS: University Press of Kansas.
12. For clarity, we present a simple outline of the system we recommend. Multiple and important details are involved in the establishment of any broad-scale policy proposal. Our aim here is to present a cohesive vision, not a detailed prescription.
13. The Alaska Permanent Fund Corporation was established through a constitutional amendment approved by Alaska voters in 1976. Its structure and operation are explained here. The Alberta Heritage Savings Trust Fund was also established in 1976 and is similar in structure.
14. The $20/ton price is what carbon credits were trading for in the European carbon exchange before the price collapse brought on by the issuance of too many free credits. The $80/ton estimate is from the Stern Review (1). We believe the initial auction price will probably be closer to the $80/ton estimate, but offer this range to bracket the possibilities.
15. Alter, J. 2007. A clear blue-sky idea: forget about a gas tax; it’s DOA. The most politically practical way to slash greenhouse emissions is a ‘sky trust.’ Newsweek, June 14.
16. Reich, R. 2007. Interview on NPR’s Marketplace.
17. Krupp, F. 2007. Climate Change: Don’t Forfeit the Game, Science. 317: 1864-5.

Figure 1. Emission paths necessary to create stable CO2 concentrations at the specified levels. Source: Stern review on the economics of climate change, 2006. Note that units are Gigatons (billions of tons) CO2 equivalent per year. Some sources provide emissions data in units of carbon (C) or carbon equivalents (Ce). Emissions reported in CO2 or CO2e units are 3.67 times emissions reported in C or Ce units due to the ratio of the mass of C to the mass of CO2. Also, some sources report only emissions of CO2 from fossil fuel energy sources, which are about 60% of total emissions, including other greenhouse gases, land use, and agriculture. Thus reported a global emission rate of 7 GtC/yr for fossil fuel burning only would correspond to a rate of approximately (7/.6)*3.67 or 43 GtCO2e/yr.