This is the second in a series; see part one.

I said in my previous post that of the three goals of climate policy — simplicity, political buy-in, and efficiency — it is possible to get only two at once. You can get simplicity and buy-in. You can get simplicity and efficiency. But when you start trying to get buy-in and efficiency together, you lose simplicity (see: Lieberman-Warner).

I’ll describe two proposals, one of which focuses on buy-in and one on efficiency. Both achieve simplicity, primarily by routing money around, rather than through, the clusterf*ck that is the federal appropriations process.

Simplicity and political buy-in: cap-and-dividend

The cap-and-dividend system devised by Peter Barnes is elegant. It would place a steadily declining cap on carbon emissions by taxing fossil fuels “upstream,” as they enter the economy. The revenue from the tax would be placed in a fund that is distributed equally to all citizens. The tax would be adjusted to achieve the desired reductions, and the funds would be distributed, by a nonpartisan agency modeled on the Federal Reserve — a “carbon fed.”

Conceptually, C&D is based on the notion of an atmospheric commons owned equally by all citizens; thus, all citizens are due remuneration when it is damaged.

What you get with C&D is virtually guaranteed political buy-in. Though energy prices would rise in the short-term, that effect would be offset for the majority (60 percent [PDF]) of people by the money received from the carbon fed. If entitlements like Social Security and Medicare (or the Alaska Permanent Fund) demonstrate anything, it is that once people become accustomed to receiving a gov’t benefit — and they become accustomed very quickly — it is virtually impossible to take it from them without being politically immolated. C&D would become another entitlement, part of the social safety net, as beloved and resistant to change as venerable New Deal programs. Though fossil interests would oppose it, broad public support would more than compensate.

What you lose with C&D is efficiency. Rather than going directly to carbon-reduction projects, the money from fossil fuels is diffused throughout the economy. Some of it will find its way back to those very fossil fuels in the form of higher energy bills. Some will become consumer spending. Renewables and efficiency will gain some comparative advantage when fossil prices rise, but nothing like what they’d have if they were reaping the revenue directly.

Simplicity and efficiency: output-based standards

This system is well-described by our own Sean Casten. It establishes an output-based standard for a particular sector — say, 0.6 MT/MWh for electricity. Electricity generators who exceed the standard pay; generators who beat the standard are commensurately rebated. As emissions fall, the standard for the sector is automatically recalculated based on the new average — no need for regular political intervention. It runs itself.

What you get here is relentless efficiency. Money is not redistributed by Congresscritters. Instead, it circulates inside each sector of the economy, a revenue-neutral churn that penalizes emitters and rewards savers in perpetuity. It is cold discipline, an economic maximization machine, driving capital to carbon reduction projects no matter their location or technological mechanism.

What you lose is political buy-in. The system is deleterious to existing centers of power in the economy, which would lobby mightily against it and, if it were passed, work ceaselessly to weaken it. Meanwhile, Joe Citizen sees no tangible benefit. Likely his energy bills rise at first; optimistically, they stay the same. Either way, he has no particular motivation to defend the system against assault by special interests.

So which ideal should we be pursuing? I am — currently, at least, and tentatively, with mixed feelings — leaning toward the former, for reasons I’ll lay out in my next post.