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A Climate Policy for People and the Environment

by estanton • August 17, 2010 @ 4:00 am

It’s time for Congress’ summer vacation, and once again, they’ll be leaving the Capitol without adopting a climate policy. Is it impossible to pass a bill that’s good for both the earth’s climate and the American taxpayer? Or did Congress just drop the ball again?

The good news is, a well-designed climate policy could slash greenhouse gas emissions, while putting money in the pockets of most Americans. The bad news is, that’s not the policy that Congress has been debating.

What would it look like, to do climate policy the right way? In a recent study, released by Economics for Equity and Environment (E3 Network), Frank Ackerman and I explored the impacts on emissions, and the costs to households throughout the country, under a wide range of scenarios. We found two basic principles for designing a fair, effective climate policy: We need to put a price on carbon dioxide emissions, and we need to use the resulting revenues wisely.

Start with the price: To reach the widely discussed goal of a 20 percent reduction in greenhouse gas emissions by 2020, the price of emitting a ton of carbon dioxide in that year should be $75. That’s definitely higher than Congress has been contemplating.

How could anyone afford that? It’s simple. If most of the carbon revenues are refunded to households, on an equal per capita basis, then a large majority of Americans will come out ahead. That is, your refund will be larger than the amount you pay for carbon emissions. If 85 percent of carbon revenues are refunded to households, then four-fifths of the country, including a majority in every state, will be better off. That’s a bigger refund than Congress has yet considered.

Under such a policy, you’d pay a lot for carbon emissions, at the gas pump and on your electric bill – but you’d get it all back, and more, in your refund check. You would  come out even farther ahead if you save energy, whether by turning off unneeded lights or by buying a more fuel-efficient car. Then you’d pay less but still get the same refund. That’s the point of the plan, the market incentive to reduce emissions.

Now for the not-so-good news: How does this differ from the ever-changing proposals emerging from Washington? Let’s look at three basic questions.

First, is the price on carbon emissions high enough to really reduce emissions? The risks of climate change are real; the laws of physics don’t need 60 votes in the US Senate to make the world grow dangerously warmer. Reducing emissions is an urgent worldwide priority, but until the largest, richest economy (that would be us) takes the lead, the rest of the world is unlikely to follow.

On this score, all recent legislative proposals have been disappointing. They have ceilings on the price of emissions, typically limiting it to $40 per ton or less in 2020 – roughly half of what’s needed to reach the targeted 20 percent reduction.

Next, who gets the money – or the permits to emit carbon dioxide, which are worth a lot of money? If emission permits are given away to industry, it’s businesses and their stockholders that reap the benefit. If all permits are sold, then the revenues can be refunded to households, as we propose. One recent proposal, the Cantwell-Collins bill, comes closest to our suggested approach, selling all permits and refunding 75 percent of revenues to households. Other leading proposals include large permit giveaways, wait decades to give refunds to most citizens, and divide revenues among many competing uses – some worthy, others pure pork.

The third question is, what else would the policy do to reduce emissions and help build a new, green economy? Investments in energy efficiency and renewable energy can reduce emissions, in concert with price incentives. These investments should be targeted to the states with the highest per capita emissions – generally those most dependent on coal for electricity generation. Reducing America’s reliance on coal is essential to the creation of a new, sustainable energy system. On this point the legislative proposals are more mixed; none seeks to phase out coal, but most do invest in efficiency and renewables.  Under our plan, 15 percent of revenues remain available after the refunds, and we recommend spending much of this money to reduce emissions and create jobs, especially in the highest-emission states.

If Congress adopts a fair, effective policy – one with the right answers to these three questions – we can do our part to fight climate change, put money in the pockets of most Americans, and start building a green economy.

To read the full report, click here.

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