Van Hollen's Cap and Dividend

Go ahead and jump for Van Hollen.

vanhollenI’m about a month late here, but I had to jot down some notes on the new cap and trade bill from Congressman Chris Van Hollen of Maryland (which is co-sponsored by Oregon’s Earl Blumenauer.) It’s not often that I actually enjoy reading a bill, but The Cap and Dividend Act of 2009 was an exception. For my money, Van Hollen’s bill gets most everything right.

First off, it sets an emissions-reduction target of 85 percent below 2005 levels by 2050, with interim decadal targets plus a provision to alter the reduction-schedule if climate science dictates.

But the real hallmark of Van Hollen’s bill is that it’s undiluted Cap and Dividend: it auctions 100 percent of the carbon permits and then dividends 100 percent of the auction proceeds on an equal per capita basis. (The auctions are quarterly and the dividends are monthly.)

Like most versions of Cap and Dividend, Van Hollen’s program allows for permit trading on the secondary market, which helps firms comply with the program at the lowest cost. However, the bill does restrict both the auction and the trading market in some interesting ways. For instance, it allows only regulated firms to purchase permits—which means that brokers and financial houses are excluded from the auction—and further, it restricts the percentage of permits that any one firm can acquire at auction or can hold at any one time during the program.

So that’s the main stuff. If you want to get into the weeds a bit—or if you want to hear my quibbles with it—everything else is below the jump.

For the most part, the bill takes a sort of lean and mean approach to cap and trade. It maximizes efficiency and minimizes complexity. For example, it sets an upstream cap on fossil fuels—at their first point of entry into the US economy — which makes a lot of sense both for administrative simplicity and comprehensiveness.

It also contains no offset program. That’s not necessarily a problem — offsets can be the Achilles Heel to the environmental integrity of carbon pricing — but because the bill’s cap is confined to fossil fuels it leaves an outstanding question about how to address the emissions from agriculture, forestry, waste, and other sectors. Offsets are be one way for a cap and trade program to expand its reach into hard-to-cap sectors like these.

But Van Hollen’s bill is narrowly focused on the emissions fossil fuels. It omits things like industrial “process emissions,” the emissions that are the byproduct of manufacturing things like aluminum, steel, and cement. The omission is potentially concerning, yet in the grand scheme of things, it isn’t a huge deal. Process emissions, for example account for only a small fraction of total US emissions, and it may be possible to address these types emissions using complementary policies. In any case, narrowing the scope to first-sellers of fossil fuels will tend to make the program considerably simpler to operate.

Let’s see, what else is worth mentioning?

The bill includes explicit language not to preempt state and regional greenhouse gas initiatives.

It also sets up a “border adjustment”—an increasingly common feature of federal carbon cap legislation — which is likely to be somewhat complicated, but is also probably important. Basically, a border adjust consists of two elements: 1) a fee levied on carbon-intensive products imported from countries without carbon restrictions; 2) a payment to domestic firms that export carbon-intensive products to  countries without carbon restrictions. The idea, of course, is to prevent countries from poaching manufacturing jobs by refusing to restrict and price carbon emissions.

It allows unlimited banking of permits, a smart move both for the climate and for stabilizing prices in the program.

The bill does allow for limited borrowing, though the circumstances are fairly tightly defined to cases where permit prices increase steeply. In Van Hollen’s bill, the borrowing isn’t done by individual firms but rather by the government, which can increase the auctioned permit supply by as much as 8 percent. (The government is required to reduce the number of permits available later on in the program by the same amount.)

Borrowing isn’t ideal from a climate protection perspective—because emissions in the near term are the most problematic — but preventing price spikes is important too. So Van Hollen’s approach is probably a reasonable compromise position, though it could be somewhat improved by attaching an “interest rate” to the borrowed permits. For example, for the government might reduce the supply future permits by 5 tons for every 4 tons of permits that it makes available for borrowing. Such a scheme would help to ensure that the program’s environmental standards are kept intact.

And then there are a few nits to pick. Here are three concerns.

First, there’s a potentially worrisome section on carbon capture and sequestration (CCS). Earlier I said that the bill contains no offset program. That’s true, except arguably in the specific case of CCS where Van Hollen’s bill awards free permits for CCS that would in excess to the total number of permits that would otherwise be allowed under the annual cap. That’s fine in theory because CCS is carbon negative, but I wish the bill set out more specific constraints. In many cases large-scale CCS is unproven, so it would have been nice if the bill required more than that the CO2 is “safely and verifiably” captured by CCS. In particular, ensuring that the CO2 is permanently captured seems important.

Second, it sets yearlong compliance periods with annual deadlines for retiring permits. It might be better to include longer compliance periods, perhaps with rolling or flexible deadlines, in order to reduce the likelihood of sharp price increases when polluters scramble for permits immediately before compliance deadlines. Plus, longer compliance periods can help smooth out untoward price changes that result from temporary factors like bad weather or disruptions to the fuel supply.

Last, it restricts the dividend payments to US residents with social security numbers. I’m not about to wade into the politics of immigration here, but it is worth mentioning that undocumented workers would be excluded from the dividend payments, a potential problem for economic equity. (Under current law, legal immigrants can obtain social social security cards.)

Still, all things considered, Van Hollen’s bill is an excellent piece of climate policy. Here’s hoping it sparks more conversation. And here’s hoping that Senator Maria Cantwell’s forthcoming cap and dividend bill can springboard from Van Hollen’s good work.

Further coverage of the bill by Kate Sheppard at Grist and by Chris Holly at Peter Barnes’ Cap and Dividend website.

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Comments

  1. eldan says:

    This “border adjustment” idea is very interesting, and if it works it could remove one of the most serious obstacles to any one country adopting a carbon cap without a global agreement in place first. Do you think the WTO would accept it?I do not have the knowledge to judge whether “process emissions” really matter or not, but in general I worry about gaps like that because they often lead to unintended consequences – for instance it could stimulate a switch to a process that creates more emissions directly, but needs less energy input.It pains me to say this, but the legal resident restriction makes sense because there’s no way a bill like this would get passed if opponents could tar it as “giving handouts to illegal immigrants”. This is a problem that needs to be solved by fixing the immigration system so that those people can get SS numbers.

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