Carbon caps – who gets the cash?

February 8, 2010

James Boyce: Different models of carbon cap legislation serve different interests

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James Boyce: Different models of carbon cap legislation serve different interests


Story Transcript

PAUL JAY: Welcome to The Real News Network. I’m Paul Jay in Washington. With the Republican victory in Massachusetts, not only the health-care legislation might be going up in flames. What’s going to happen with the climate change legislation, all the various different models of it? And to help us unravel the situation, we’re now joined by Professor James Boyce. He teaches at the University of Massachusetts Amherst, and he’s associated with the PERI institute (the Political Economy Research Institute) there. Thanks for joining us.

JAMES BOYCE: Happy to be here.

JAY: So, before we get into the politics of all this and what the Republican victory might mean in terms of what the real outcome is, let’s first of all talk about the possible solutions or models that are on the table. So give us a basic grounding in what kind of legislation, in terms of controlling carbon emissions, is on the table, and then tell us what you think of it.

BOYCE: Right. Well, broadly speaking, there are two ways you can go about controlling carbon emissions, and the legislation involves some mix of these ways of doing so. One way is to reduce the supply of carbon coming into the economy, reduce the amount blown out the smokestacks, therefore, and are contributing to the problem of global warming. If you cut the supply, what it means is it gets more expensive. It’s sort of like when OPEC wants to raise the price of oil: what do they do? They cut the supply. It’s the same basic idea. When OPEC cuts the supply, they get the money. When we cut the supply by putting a cap on carbon emissions, one of the big questions is [inaudible]

JAY: [inaudible] the government.

BOYCE: "We" meaning the US government, or a state government, as they’re doing in California. So that’s one broad way to attack the problem. The other way is to take steps that reduce demand at any given price for fossil fuels. And the way you do that is through various sorts of public investments that improve the options in terms of renewables, weatherization, public mass transit, etc., etc.

JAY: This is sort of retrofitting a building for more energy, to make them more energy [inaudible]

BOYCE: Yup, yup, yup. All of those kinds of things reduce the demand for carbon. Regulations like low carbon fuel standards for automobiles reduce the demand for carbon, right? So you’ve got these two broad ways, and most of the policies involve some combination of the two; that is to say, they involve a cap on the total amount of carbon that’s going to be emitted, and they involve measures that are going to reduce demand.

JAY: So let’s talk about the different models of cap, ’cause that’s where the contradiction seems to be.

BOYCE: Yeah, yeah, yeah, yeah. And these are, of course, connected, because if you have a cap and it raises the price (as it must do) of fossil fuels because you’re limiting the amount that’s been burned, so the prices of oil, coal, natural gas are all going up as a result of the cap, what that’s going to do is it’s going to send price signals out to firms and to households that this stuff’s getting more expensive and it’s going to keep getting more expensive, ’cause the cap’s going to get tighter and tighter, and therefore there are incentives to invest in the kinds of things that will reduce demand for fossil fuels down the road—invest in solar, invest in renewables, and so on. Right? So the way the cap basically works is you put a limit on the total amount of carbon dioxide emissions that we’re going to emit in the United States through burning of coal, oil, and natural gas, and you issue a bunch of permits—these are also sometimes called "allowances"—the total number of which equals the number that’s allowed under the cap. So there are so many million tons of carbon dioxide. You have that many million permits, each of which allows the holder of that permit to bring a ton of carbon dioxide into the US economy, and ultimately to see that ton of carbon dioxide blown into the sky. Right? So that’s the way a cap works is it’s through creating a set of permits that are issued up to the total cap.

JAY: So the controversy then becomes: do you give these permits away, or do you charge for them? And then, who gets the money?

BOYCE: Those are the big issues, because what’s going to happen, regardless of whether you give the permits away or sell the permits to the firms, to the fossil fuel firms and the polluters, is that the cost at the pump for ordinary Americans when they’re buying gasoline, the prices they’re paying for their electricity, and the prices they’re paying for heating oil and natural gas, and the prices they’re paying for all the other commodities that are produced or distributed using these fossil fuels, all of those prices are going to increase at least somewhat to reflect the fact that you’re making these fossil fuels more scarce. So you’ve got three basic ways in which you can distribute that money that’s ultimately coming out of the pocketbooks of every consumer in proportion to the amount of fossil fuels that they use. The more they use, the more they’re going to be paying as a result of those higher prices. So you have three basic models in terms of how you distribute that money. And the legislation, some of it involves a mix of these; some of it’s clearly one or the other. So one of the models is what can be called cap-and-giveaway, where you give the permits for free to the polluters—you don’t charge for them. Now, does that mean prices don’t go up to consumers because you gave the permits for free? No. The price still goes up, because you’ve still got the imposed scarcity of fuels that’s going to be raising their price. But the permits, the value of those permits, the price increases associated with them in the giveaway case, comes back to the firms and it stays there. It’s what’s called windfall profits. That’s what happened in the European Union scheme for electric utilities: they gave the permits to utilities; the utilities kept the money. That’s what happened in the sulfur dioxide permits scheme in the United States, introduced under the Clean Air Act amendments in 1990: 98 percent of the permits were given away to the electric utilities, and they got to keep the money. Now, sulfur dioxide was small potatoes compared to carbon dioxide. In the case of carbon dioxide, we’re talking about a lot of money that these permits are worth. So the first model is to give away the permits and let the firms receive windfall profits.

JAY: Now, what firms would fall under this? I mean, if I have a small factory with 20 employees and I’m shipping stuff out with trucks, am I going to have to get a permit? Or are we just talking major megacompanies?

BOYCE: This is the problem of defining what is called the "compliance entity", who’s going to need the permits.

JAY: And how is it enforced?

BOYCE: The simplest way to do it, the way that is cheapest in terms of administrative costs, is not to require permits from everybody who’s burning fossil fuel—that includes you and me; it includes every company in the country. You’d have millions of people who would need to have permits with that kind of end-of-pipe approach to the permits system. So, instead, the way that is usually recommended by economists to implement such a scheme is to have the limit on the amount of fossil fuels that come into the economy—. The coal coming out at the mine head, the oil coming off the tanker, the natural gas coming out of the pipeline, those are the points at which the firm that’s introducing those fossil fuels into the US economy has to have permits for the—so many tons of coal means so many tons of carbon. They need to have the permits to cover [inaudible]

JAY: So we’re not really talking that many players, then.

BOYCE: No. The Congressional Budget Office estimates that that sort of system—it’s called an upstream system, ’cause it’s hitting the carbon when it comes into the economy, before it gets diffused—that would involve about 2,000 entities, firms, utilities that would have to hold the permits. It’s really the firms that are involved in the coal, oil, and natural gas business.

JAY: Okay. So go to the next step, then, the controversy over whether you give away or you charge.

BOYCE: Alright. So it is sometimes thought, but it’s mistakenly thought, that if you were to give these permits away, somehow prices wouldn’t go up to consumers. But the fact is that by creating permits and limiting the amount of fossil fuels we’re going to use, prices are necessarily going to go up. Just like when OPEC cuts supply, prices go up. This is a cut in supply, and so the prices are going up, and that’s a cost to consumers. It’s not a cost to the economy as a whole for the following reason. In the case of OPEC, when they’re cutting supply and raising prices, the money goes out of the United States; it goes to the oil producers overseas. In the case of permits, that money’s being recycled within the United States economy. It’s what economists call a transfer, rather than a cost. And so the question is: to whom does that money get transferred?

JAY: Okay. Let’s hold that for the next segment. But just drill in a little further here, the argument versus what you call cap and giveaway or cap and charge. [inaudible] that argument first of all.

BOYCE: So the cap-and-giveaway system involves a transfer of money from the consumers to the holders of the permits, right? A cap-and-spend system, which is a second option, involves, instead of giving the permits for free to the fossil fuel companies or whoever the compliance entities are, instead the permits are auctioned off, they’re sold. They have to buy, right? And they’re willing to pay whatever those permits are worth to them, and the cost is then passed along again to the consumers. It’s part of the scarcity resulting in an increase of prices.

JAY: And what’s the advantage or disadvantage of [inaudible]

BOYCE: So the advantage of auctioning the permits is, first of all, you don’t have any political fix in terms of who’s going to get them: everybody competes on a level playing field. You don’t say, "We’re going to give you a bunch of permits ’cause you’re our friends, and we’re not going to give this many of you." Anybody, any of the entities that need the permits, the fossil fuel firms, can buy those permits in the auction. And the auctions could be held quite frequently—quarterly, even monthly [inaudible]

JAY: So no industry has any advantage, coal versus oil versus natural gas.

BOYCE: You’re not picking winners. You’re not privileging this vested interest over that vested interest. They’re there. It’s a level playing field. Everybody needs a permit in order to put a ton of carbon into the economy, and thereby into the atmosphere. The other advantage is that by auctioning them, instead of resulting in windfall profits when you give the permits away, the money comes back to the public or to the government as the revenue that they receive in the auction. And the amount of money we’re talking about here at the federal level could quickly reach hundreds of billions of dollars a year. We’re not talking small potatoes here. Big bucks, right? So then the cap-and-spend option is the government keeps that money and it spends it, right? It uses that money to fund—fill in the blanks. It could be public investments in clean energy. It could be war in the Middle East. It could be tax cuts for those who pay a lot of taxes. All of those things are possible ways that the government could use the money. That’s what’s called cap-and-spend. How people feel about that really is sort of a litmus test of how they feel about the government. So that’s the second of the three options.

JAY: Okay. In the next segment of the interview, let’s talk about the third, which I think is the one you like, which is [what] I think you’re calling cap-and-dividend. And if you want to know what cap-and-dividend is, you’re going to have to watch part two of the interview.