David Roberts asks:

Who, in this scenario [carbon revenue rebated to consumers], has any new incentive to shift to low-carbon electricity or efficiency?

Short answer: everyone.

Let’s say I’m your utility, and I raise your energy prices so that, at present rate of consumption, your bill will rise to $50,000 per year. Pretend that energy here means everything: heating oil, electricity, natural gas, everything encompassed in a carbon cap. Then I hand you an annual rebate check for $50,000. You can do two things.

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  1. Give the money right back to me to pay for energy. Money is shuffled. Nothing changes.
  2. Use part of the $50,000 to install a solar hot water heater, put in triple-glazed windows, and replace your light bulbs. Then you set your programmable thermostat two degrees lower, throw away your second fridge, and hang a clothesline. All of this will cost you a few thousand dollars, and you’ll slash your energy use in half. Now, year after year, you pocket $25,000 from the rebate check.

This is, obviously, a toy example, but it helps to show where the “money shuffling” criticism of cap-and-rebate goes wrong. When you change the relative prices of things, people shift their consumption patterns, even if they have more money to spend.

Update: Note, also, that your behavior doesn’t really depend on getting that rebate check. If I raise your annual energy bill to $50,000, you’d be a fool not to install the solar water heater and clothesline regardless. The rebate just changes the distributional consequences of the carbon cap. Under a rebate scenario, you actually wind up richer. Under a permit giveaway scenario, the utlity winds up richer.

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Another problem with the money-shuffling theory: it ignores the action of the cap. If for some reason people don’t change their energy consumption patterns when they get their rebate checks, then the cap is going to bite. Carbon permits will become more expensive. Prices will rise until people do change their consumption patterns.

A third problem: David says, “Business costs rise, but they get that money back by raising prices for consumers.” This is the persistent fallacy that businesses can pick whatever price they want, so they don’t care about costs. In the real world, businesses care about costs an awful lot. Fortunes are made and empires built on the ability to squeeze costs out of the supply chain. When carbon carries a price, businesses that can find efficiencies or switch to non-carbon sources of energy will be able to pass those savings on to their customers. Then their competitors will go out of business. Then environmental bloggers will do little happy dances, writing about the smart green companies that are growing rapidly, hiring new employees, and wringing a profit from the new green economy. Hoo-ray!

(Note that the logic above also applies to David’s Netflix example. Most people would quit Netflix, pocket the $5, and either join a competing service or watch something on cable. The key thing here is that, under cap-and-rebate, you get to keep the rebate even if you’re no longer a Netflix subscriber.)

Update 2: Other bloggers are piling on. We’re all saying the same thing, but for the record, I was first.