Op-Ed: Why fee and dividend is better than cap and trade at fighting climate change


California is leading the nation in taking action on climate change. AB 32, passed in 2006, established carbon pricing in the state with a system called cap and trade.

Simply put, this system caps carbon emissions from large polluters by selling a set number of emission allowances at state auctions. The number of allowances sold declines annually until California’s emissions goals are achieved. Businesses can trade their surplus allowances to those that find it difficult to reduce emissions. The money the state collects from the auctions goes toward other emission-reducing measures mandated by AB 32, including sustainable energy projects and rebates for electric cars and solar panels.




In a March 5 Op-Ed article on fee and dividend carbon pricing, the United States was identified as having the highest per capita CO2 emissions in the world. In fact, many countries have higher per capita CO2 emissions, but of the top six carbon emitting countries or regions (U.S., China, Russia, India, Japan and the European Union), the U.S. has the highest per capita emissions.


What AB 32 set in motion has begun to reduce California’s emissions. But California alone can’t solve climate change. The U.S. has the highest per capita carbon emissions in the world. Between what we emit at home and what is emitted abroad in the making and shipping of goods we consume, Americans are responsible for close to 30% of global carbon dioxide. Although China and the U.S. have recently set mutual targets, for years the lack of a national commitment to reduce emissions prevented other big polluters from reducing theirs. And unless global emissions decrease, California will suffer catastrophic effects of climate change along with the rest of the world.All of this points to an urgent need for a national climate policy. California would like that policy to include its cap and trade program as the centerpiece. But despite the program’s successes so far, this method of pricing carbon does not provide the best model for federal legislation.

One reason is that cap and trade does not address secondary consumption, the emissions that are generated offshore for goods we consume. If we ignore those emissions, we cut our ability to reduce our totals by half.

Another reason is politics. The effectiveness of California’s program is dependent on careful implementation and oversight that entailed the construction of a sizable administrative infrastructure within the California Air Resources Board. On the national stage, Republicans in Congress would never allow the increase in the size of government necessary for an effective federal cap and trade program.

The complexity of cap and trade is also a barrier to scaling up the program without reducing its effectiveness. Getting the details wrong can mean the difference between success and failure. The European Union’s program is a case in point: It hasn’t adequately reduced emissions partly because the cap was set too high and attempts to remedy the problem haven’t worked yet.


There is no time for that sort of trial and error if we are to avoid the most catastrophic effects of climate change. Instead, we need a price on carbon that we know will work and that can be implemented effectively and quickly.

There is a simple solution that will bring down emissions quickly without increasing the size of government, and without cumbersome regulation, both of which are anathema to Republicans. It’s called a carbon “fee and dividend” plan.

It works like this: A fee is placed on carbon-based fuels at the source (well, mine, port of entry). This fee would start at $15 per ton of CO2 emitted and increase steadily and predictably each year by $10. Within a decade, clean energy would be cheaper than fossil fuels, giving entrepreneurs and investors an incentive to back clean energy sources.

All the revenue realized from the fees would be evenly distributed to all Americans to help pay for increased costs of goods and services. And while cap and trade puts more of the burden of increased costs on lower-income Americans who spend a greater share of their income on energy, fee and dividend protects the less well-to-do. Because they use less energy on an absolute basis, their equal dividend share will more than cover their added costs.

Fee and dividend would also include a border adjustment, so that importers from countries that do not adopt similar carbon pricing would pay their fees at our border. Economically, this ensures a level playing field for U.S. companies. On the emissions side, it ensures that secondary consumption is accounted for, and encourages all countries to place similar fees on carbon.

Fee and dividend is a policy that climate scientists and economists agree is a good first step to reduce catastrophic effects of climate change. California would benefit because the rapid decrease in emissions would be good for the state’s pollution problem and would make costly future AB 32 regulations unnecessary.


And it scales easily. As more nations adopt the system, worldwide demand will bring green technologies to mass market faster, driving down costs and making the transition to a green economy easier for everyone.
But the biggest advantage of enacting carbon fee and dividend is that it’s the quickest way to bring down emissions so we can stabilize, then start restoring, our climate for our grandchildren.

Noelle Sedor is a member of Citizens’ Climate Lobby in Oakland.

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