As senior members of Congress lay the groundwork for a new legislative debate on climate change next year, a new proposal making the rounds of Capitol Hill offices would replace the cap-and-trade approach now in vogue with one in which all carbon permits are auctioned and all auction revenues are returned to consumers.

This “cap-and-dividend” approach, being shopped on the Hill by California entrepreneur Peter Barnes, also would shift the cap from carbon emitters such as electric utilities to carbon suppliers—coal, oil and natural gas producers. Barnes will outline his plan at a recent House Ways and Means Committee hearing.

K-I-S-S

Under the proposal, fossil fuel providers would have to surrender permits or allowances for each ton of carbon contained in the fuels they sell into the economy, and they could obtain the permits only from a government auction. All the revenues from the auction would be redistributed to consumers in monthly dividends.

The proposal’s elegant simplicity is at the core of its attraction, supporters say. Shifting the point of regulation upstream to fuel providers would reduce the number of regulated entities to a few hundred oil, gas, and coal companies.

By comparison, an emissions cap-and-trade scheme, such as that contemplated in legislation by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.), would affect thousands of power plants and industrial facilities.

Under the cap-and-dividend plan, there would be no emissions trading to monitor and no emissions offsets to verify, obviating the need for a massive new government bureaucracy. Distributing the monthly dividends to consumers could be done electronically, by wire transfer to banks or directly to debit cards. “You could manage the whole program with two or three guys and a computer,” said Barnes.

The dividends would be taxable, and Barnes estimates that the federal government would receive through taxation about 25% of the auction revenues, which it could use to fund clean energy research; reduce taxes or the national debt; or assist energy-intensive industries or low-income consumers hit hardest by the carbon cap.

Universal Appeal

A cofounder of Working Assets, a nonprofit that provides credit card and telephone services and donates a portion of its revenues to support progressive causes, Barnes said that the distribution of the auction revenues to consumers is a crucial element of the proposal.

Capping carbon will increase the cost of energy and other economic goods and services, but the monthly dividend will help cushion the impact for all consumers, Barnes said. If consumers reduce their energy use through increased efficiency, they effectively increase the value of their dividends. And every time the carbon cap is tightened, each consumer’s monthly check will increase proportionately, he said.

“Getting the psychological benefit of a monthly dividend check is very important,” Barnes said. “To the extent you can sell a carbon cap to the American people, this is the only way you can sell it and keep it sold.”

Political Realities Emerge

Critics of the proposal suggest that, while attractive theoretically, it ignores political realities in Washington and the power of oil, coal, gas, and utility lobbies. A utility attorney said that if the proposal were enacted into law, power companies would be faced with sharply higher fuel costs and worry that they might not be able to pass on all the cost increases to consumers.

At the same time, the attorney said, the shape of the climate change debate so far has led energy-intensive industries to conclude that they will be getting government assistance—in the form of free emission allowances—to help them cope with higher energy prices resulting from a carbon cap.

“Any new proposal that doesn’t involve cost relief for some of these companies is going to attract their organized opposition,” the utility lawyer said.

A veteran politico who now works on energy policy issues was bluntly dismissive of the proposal: “The notion that electric utilities, the oil and gas industry, the automotive industry and others are just going to lie down while all this occurs is simply absurd.”

But Barnes said that as he has shopped the cap-and-dividend proposal on the Hill, no one has raised any significant objections or identified fatal flaws.

“I have to say that this is probably no one’s first choice for a climate change program, but I think it’s a lot of people’s second choice,” he said.

Debate Continues

The Senate debate on the Lieberman-Warner legislation this year revealed some of the political pitfalls that a cap-and-trade system must overcome to be enacted into law. There is sharp disagreement in Congress and among utilities and other affected industries over whether to auction allowances or give them to emitters, and how to use auction revenues. A failure to resolve these disputes was a key reason the bill died on the Senate floor.

Dallas Burtraw, a senior fellow at Resources for the Future who has done extensive research on the architecture of cap-and-trade programs, said that the cap-and-dividend approach may emerge as the preferred fall-back option if lawmakers cannot resolve the numerous cap-and-trade design disputes.

“I think it’s got to be taken seriously,” said Burtraw on Sept. 17, a day prior to his appearance before the House Ways and Means Committee. “It’s quite a robust idea because of its simplicity.”

Transcripts of all the presentations made to the House Ways and Means Committee’s Hearing on Policy Options to Prevent Climate Change can be viewed here.

—Chris Holly (cholly@accessintel.com) is a reporter for COAL POWER’s sister publication, The Energy Daily.