Hansen: Fee-and-Dividend not Cap-and-Trade

NASA’s James Hansen, one of the most prominent (and alarmist) climate scientists, argues against cap-and-trade plans in today’s NYT.  While I don’t quite agree with every point in his analysis, I agree with his bottom line.  Cap-and-trade is unlikely to produce meaningful emission reductions, but will require the creation of a massive regulatory bureaucracy and provide a rent-seeking bonanza for special interests (something prominent defenders of cap-and-trade legislation used to recognize).  In place of cap-and-trade, Hansen proposes an alternative: Fee-and-Dividend.

Under this approach, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production.

All of the collected fees would then be distributed to the public. Prudent people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on. Those who do better than average in choosing less-polluting goods would receive more in the dividend than they pay in added costs.

For example, when the fee reached $115 per ton of carbon dioxide it would add $1 per gallon to the price of gasoline and 5 to 6 cents per kilowatt-hour to the price of electricity. Given the amount of oil, gas and coal used in the United States in 2007, that carbon fee would yield about $600 billion per year. The resulting dividend for each adult American would be as much as $3,000 per year. As the fee rose, tipping points would be reached at which various carbon-free energies and carbon-saving technologies would become cheaper than fossil fuels plus their fees. As time goes on, fossil fuel use would collapse. . . .

In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world.

A Fee-and-Dividend approach would be more transparent, less vulnerable to special interest pleading, more conducive to investment in technological innovation (because it would avoid the price volatility produced by cap-and-trade), would be easier to implement within existing trade rules (and would not require a new international agreement for this purpose), and — if implemented as Hansen suggests — be less costly to most Americans.

Given that meaningful cap-and-trade legislation is unlikely to pass Congress — even the lard-heavy Wazman-Markey just squeaked through the House with 218 votes, and that was before ClimateGate — those interested in serious climate policy should consider this sort of alternative.