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James Boyce: Auction, cap and rebate is a better way to control carbon emissions

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, and joining us again now is James Boyce. He’s a professor at the University of Massachusetts Amherst. He’s associated with the PERI institute, the Political Economy Research Institute. And you’re working on climate-change policy. So in the first segment of the interview we talked about some of the different potential models of how cap works, and whether it’s giveaway cap or whether it’s paid-for permits. But then the next question comes—that’s assuming it’s paid-for permits—who gets the money and what’s done with it. So talk about the possible models there.

PROF. JAMES BOYCE, UMASS AMHERST, PERI: Right. So recapping, then (no pun intended), one of the effects of a carbon policy is to raise prices to consumers. The value that permits have is because consumers are paying extra money for the scarce fossil fuels. And the question is: who gets that money?

JAY: And part of the question there is that the poor disproportionately pay when there’s a pass-through in terms of—relative to their all overall income.

BOYCE: That’s right. People pay in proportion to the amount of fuels they consume. So the rich consume more than the poor and pay more in absolute dollar terms, but as a percentage of their income the poor pay more, because fuels are necessities, not luxuries.

JAY: And to use the grammar of today, the middle class—’cause apparently the middle-class aren’t poor, although I think these days that’s not true.

BOYCE: Well, as a percentage of their income, the middle-class pay more than the rich and less than the poor. It’s what’s called a regressive policy, like a regressive tax: it hits the poor as a percentage harder than the rich, with the middle being in the middle. So one of the possibilities, if those permits are auctioned rather than giving them away—as we talked about before, giving them away means windfall profits for the recipients of the free permits—if instead the permits are auctioned, then one of the possibilities is that money goes to the government, which uses it for tax cuts or new expenditures. Another possibility—and this is what’s called cap-and-dividend and is embodied in the Cantwell-Collins bill, introduced in December in the US Senate—is that a large chunk of that money goes straight back to the American public in the form of equal per capita dividends.

JAY: And in that legislation they’re talking 75% [inaudible]

BOYCE: Exactly. What the Cantwell-Collins proposed is that 100 percent of the permits would be auctioned. None of them would be given away. And of the revenue received from those auctions, 75 percent would go back to the American people in the form of equal per capita dividends for every man, woman, and child in the country, and the other 25 percent would be going into an investment fund that would be used for investments in clean energy, research and development, weatherization of public buildings, transportation, transitional adjustment assistance for workers and communities that are hit by the move away from a fossil fuel dependent economy—coal mining communities, for example.

JAY: Now, one of the knocks on the scheme like that is going to be—is the rich are going to get their $300 check as well. Should there not be some kind of structure of where that money goes?

BOYCE: That’s an interesting question. What—cap-and-dividend is an example of what’s called a universal program, just like Social Security’s universal. People get Social Security—regardless of whether they’re rich or poor, they get Social Security. Ditto with the dividend. In the case of the dividend, it’s equal for everybody: the rich get just as much as the poor. So the net effect of a system like this on the real incomes of households depends on the difference between how much extra they’re paying for fossil fuels and what they’re getting back in the form of the dividend. Because the rich spend more—. They’re rich. That’s part of being rich: you consume more. Because they consume more, because they have bigger houses, bigger cars, fly around on airplanes for vacations, etc., they pay more in higher fuel prices as a dollar amount than do the poor or the middle-class, yet everybody gets back the same amount as a dividend. So what that means is that in general the wealthier households, the more affluent households, will be paying more than they get back, and the poorer households will be getting back more than they pay in, and the middle-class will be protected from the impact of higher prices, so that as gasoline prices go up to $4 or $5 a gallon down the road, that money’s coming right back into their pockets and insulating them from the hit that they would otherwise be taking in terms of their real incomes and living standards.

JAY: So talk about the two different bills in the Senate and how they deal with this question.

BOYCE: So the two bills are the Cantwell-Collins bill, introduced in December by senators Maria Cantwell of Washington and Susan Collins of Maine, that, as I described, would provide 75 percent of the allowance value, the value of these permits, back to the public in the form of dividends and use 25 percent versus investment; and on the other side, the bill that passed the House of Representatives in June, which is called the Waxman-Markey bill, also called the ACES act [American Clean Energy and Security Act], which now in the Senate is being considered as well, and in the Senate it’s sometimes called the Kerry-Boxer bill, because they’re both involved in that particular piece of legislation. So under the Kerry-Boxer or Waxman-Markey bill (the one that passed the House), there’s a far more complicated system for how to distribute these permits and the value of those permits, and it changes over time. Initially, a lot of the permits, roughly 85 percent, are given away, and only 15 percent are auctioned. Gradually over time, the percentage auctioned increases. The giveaway provisions of it also include provisions where some of the recipients of the free permits are meant to, quote-unquote, “protect” consumers by passing along the savings, because they don’t receive the permits, to their consumers. Right? This is particularly for the electricity local distribution companies who would get a lot of the permits for free under Waxman-Markey. And the state public utilities commissions are meant to ensure that rather than those free permits resulting in windfall profits to the owners of the utilities, the utilities pass-through the savings to their customers.

JAY: And what’s to make them do that? What’s to make sure they do that?

BOYCE: Well, the ability of the state public utilities commissions to enforce that is, of course, an open question that is likely to vary, somewhat, at least, from state to state. But moreover, even if 100 percent of that particular chunk of the permit value got passed back to consumers in the form of reduced electricity bills compared to what they would have otherwise been, in the end the people still get hit, because if they get back the permit value in the form of lower electricity prices, what it means is that that price signal that we talked about that these permits create that lead people to conserve energy isn’t being transmitted for that electricity. If there’s no signal saying, “Hey, you know, burning coal has a cost, and my electricity bill reflects that cost, and it gives me an incentive to invest in solar or weatherize my house” or whatever, so because that signal’s not passed along, people aren’t conserving the electricity, right? Yet there’s a cap on the total carbon emissions. If you’re not going to conserve that electricity-generated carbon, right, the coal-burning electricity in particular, it means that other sectors of the economy are going to be where the adjustment takes place, and besides coal-fired electricity the other big sector is liquid fuels, transportation fuels in particular—oil, gasoline, diesel. Right? So what it means is that the cap is going to bind even more tightly on those transportation fuels, because that’s where the adjustment is taking place, ’cause the consumers are being protected from the price signal—at least, supposed to be protected—on the electricity side, and so that means the prices of fuels, liquid fuels, is going to go up even more. So in the end, the consumers pay more. If you’re going to limit the amount of carbon dioxide going into the atmosphere, consumers are going to pay more.

JAY: Okay, let me feed this back to you to make sure I’m getting it. So one model is, under the Markey bill, the energy, electrical companies are going to just agree, or I guess be forced to, in some regulatory way, to pass through the savings they’re getting from getting free permits, so the cost of electricity does not go up for a consumer; versus a model where the cost of electricity actually would go up, but consumers would actually get a direct check from the government as a result of having charged for these permits. Now you’ve got, say, $300 bucks in your hand, and you can decide: do I really want to spend this on my higher electrical bill, or would I rather try to conserve my electrical use and have this $300 to use on something else? And then the other piece of what you said is, if you go the first route, you’ll wind up driving up the price of oil, so you’re going to wind up spending more money on gasoline anyway.

BOYCE: You got it. That’s right. The Waxman-Markey provisions include a lot more than just the giveaways to the electric utilities. The Waxman-Markey cap and trade title alone in that bill is hundreds of pages long. The Cantwell-Collins bill, by contrast, is less than 40 pages long. It’s a much simpler and cleaner bill. Waxman-Markey has a lot in it. But your basic understanding of that difference is absolutely correct. And one could ask the question: if the aim is to protect consumers from the impact of higher prices, why not give the money back to the consumers? If I want to help you, if you think the most efficient way for me to do that is to give money to your electric company and have them limit your rate increases—. I think the best way to help people is to give them back the money. And it’s also—and this is politically really important, I believe—it’s the most visible and transparent way to give them the money, because when the prices go up for gasoline, for heating oil, for electricity, potentially, people are going to see that. These are prices that are very visible, right? Gasoline prices are the most visible prices in the entire US economy—they’re displayed in foot-high numbers on street corners across America. People know the price of gasoline, right? They need to know where that money’s going and that it’s coming back to them, if they’re going to continue to support this legislation, not only to get it passed, but to keep it as the law of the land for the 40 years it’s going to take to implement the transition away from a carbon-dependent economy to a new, clean-energy economy. This policy has to be built to last, and to last there has to be a way to make the American public willing, indeed more than willing, happy, to be paying higher prices for fuels. And it seems to me the way that you do that is to make sure that they can see that the money’s coming back and it’s benefiting them as individuals and as families, and the families that consume the least fossil fuels are going to be benefiting the most.

JAY: In the next segment of the interview, let’s talk about the other big carbon elephant in the room, trade and offsets, ’cause that’s another major difference between the two bills.

BOYCE: Happy to do that. Yeah.

JAY: So please join us for the next segment of our interview on The Real News Network.

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James K. Boyce

James K. Boyce is a Professor at University of Massachusetts, Amherst. He is the Director of the Program on Development, Peacebuilding, and the Environment at PERI - The Political Economy Research Institute.