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Carbon caps – who gets the cash? Pt.5

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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 is Professor James Boyce. He teaches at the University of Massachusetts Amherst. He’s associated with the PERI institute there. Thanks for joining us again.

PROF. JAMES BOYCE, UMASS AMHERST, PERI: Nice to be back.

JAY: Okay. Let’s talk about a place where the legislation has been passed, a form of carbon cap legislation in California. You’ve been working on a committee to decide exactly where the permit money is going to go. So what can we learn from the California experience?

BOYCE: Well, California passed its own bill, the Global Warming Solutions Act, in 2006. And in California, they took a somewhat different strategy than the one in Congress, here in Washington, in that they left a lot of the details to be sorted out later. The legislation simply said: these are the broad targets; these are the emission reductions we in California are going to achieve because we understand that there’s a problem with global warming, and we want California to be in the forefront of addressing that problem, and California industries to have the advantage of first movers, in terms of industries that are anticipating the coming increase in prices of fossil fuels and are making the kinds of investments that are going to position them to be competitive in the years ahead. So that was what California did. Now, the job of figuring out how exactly to implement the policy has been unfolding over the years since the bill was passed, and the policy will go into effect and start being implemented in the year 2012. So I was asked in May to serve on a committee called the Economic and Allocation Advisory Committee. It has the less-than-melifluous acronym EAC, the Economic and Allocation Advisory Committee—EAC. And we were appointed by the governor, Governor Schwarzenegger, to provide advice. We don’t decide what happens, but we make recommendations about what we think should happen in terms of how to—.

JAY: Who decides?

BOYCE: The California Air Resources Board and the California legislature may end up weighing in on this as well. So we made recommendations in terms of what should be done in the allocation of the permits under the cap that’s going to be established as part of the system, and—.

JAY: So just to be clear—so in the model between cap-and-giveaway and cap-and-charge-for-the permit, California has decided to charge for the permits.

BOYCE: Well, they’ve decided to have a cap. And one of the questions we were asked to consider was whether permits should be given away or auctioned, or some mix between the two. And what our committee recommended (the recommendations were submitted on January 11) was that virtually 100 percent of the permits should be auctioned, not given away, and that the auction revenue should be distributed in two main ways: roughly 75 percent of the revenue from the auctions of the carbon permits in California should go back to the California public, either as equal per-capita dividends, like is proposed in the Cantwell-Collins bill here in Washington, or as tax cuts. The committee didn’t reach a consensus on which was better. Personally, I favored dividends. Other members of the committee favored tax cuts. So we said: one way or another it should go back to the public. The other 25 percent we said should go into investments, public investments in the clean-energy transition, investments of which a portion could—and I believe should—be specifically allocated to disadvantaged communities, which is part of the California legislation [inaudible]

JAY: Now, the difference between tax cuts and dividends and direct payments is a big difference. I think it is a big difference. And let me try to give you both sides of this argument, right? The argument for dividends instead of tax cuts is that everybody gets the same amount back, no matter whether they’re rich or poor, no matter whether they pay a lot of taxes or don’t pay any taxes at all: everybody’s paying higher prices at the pump for fossil fuels; everybody is getting back their share of the dividends equally, regardless of their tax status. The tax cuts, on the other hand, unless it was accompanied by a change in the tax structure, right, unless it changed the relative progressivity of California’s income tax structure, for example, which is quite progressive—the rich pay a lot higher a percentage of their income in income taxes in California than do the poor, right? If you didn’t change that structure and you put the money back to the public in the form of tax cuts, the people who get the biggest benefits are the people who pay the most taxes and therefore get the biggest tax cuts. So the proponents of tax cuts on the committee understood that risk, and also recommended that if there were tax cuts, there should be some special assistance to low-income households below a certain threshold to protect them from the effects of higher prices, ’cause they wouldn’t be getting much back in tax cuts. What that means, I fear, is that you would end up protecting the poorest Californians. A lot of the rest of the money would go back to the richest, and the people who would really take it on the chin are the middle class. That’s what I fear. And the middle class are an important constituency for the political viability of the policy over the long haul. So that’s one of the reasons I prefer dividends. Now, the reason why some economists like the idea of tax cuts is they believe (and this is a theory that is widely taught and believed by many professional economists in public finance; I happen to be a little skeptical about it) income taxes create very big disincentives for people to work and invest, and thereby lower the total economic activity, lower gross domestic product or state domestic product, so that by cutting those income taxes, people will work more and invest more and grow the economy, and that’ll be an efficiency gain.

JAY: And we know there’s been a tremendous success story about cutting taxes in California up until now. So—.

BOYCE: Well, California has a lot of economic problems, but I guess my own view is that the main problem of America’s not that people don’t work hard enough, you know, that they don’t have incentives to work. You know. There are a lot of people who would like to work and can’t even find jobs, right? So I personally don’t think that supposed efficiency advantages of tax cuts are really a big selling point.

JAY: And where’s the California legislation on the question of trade and offsets?

BOYCE: Well, some of these details are yet to be worked out. The California system will involve trading, because the permit, the compliance entities, are not the first sellers of fossil fuels into the economy, but they include power plants and cement plants and so on, right? And it seems pretty likely to me that there will be trading, although, as I explained earlier, if you’re auctioning off the permits, you don’t necessarily need to trade. You could do it without trading. But it seems that what they’re thinking about is trading. This was a part of our committee’s recommendations.

JAY: And would that trading open up the possibility for—you were saying, like, upstream, only the major fossil-fuel importers or generators—.

BOYCE: Would be required to hold the permits, yeah, yeah.

JAY: But in California trading system, does it open it up for finance companies getting involved?

BOYCE: Well, that is something that will still have to be decided. That’s one of these open questions, who will be allowed to hold and trade the permits. They could limit it to the compliance entities, they wouldn’t necessarily have to open it up to speculators in the market, and it remains to be seen what they’ll do. Right? That’s [inaudible] And, similarly, you raised the question of offsets, Paul. It’s an open question to what extent offsets will be allowed as a way for the firms—the power plants, the cement plants, the petroleum refineries, etc.—to meet their obligations. Is it going to be possible for them, instead of reducing emissions, to buy some sort of offset somewhere, instead of buying a permit, and say, "Oh, well, we paid somebody somewhere else to do something that reduced net emissions. And it’s an open question. My own guess and hope is that the scope for offsets will be very limited in the California legislation, but industry is pushing—they would love it if 100 percent of the emissions reductions could be accomplished through offsets, with not needing to buy or hold any permits.

JAY: So, much warfare still to go on the California legislation?

BOYCE: There’s a lot to go, but let me mention one last point, right, which is that Governor Schwarzenegger, who’s a Republican, right, when he appointed the committee, he asked us to pay particular attention to the possibility of providing dividends back to the California public as a way to maintain living standards and maintain the health of the California economy. So, again, it seems to me that that dividend option is something that does potentially enjoy support from a wide swath of the American political spectrum. It’s not just a Democrat idea.

JAY: Well, thank you very much for a primer on climate change policy. And I hope that’s helped you understand and decide which part of this you’ll support or not. Thanks again for joining us on The Real News Network.

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