If we want to protect the atmosphere for generations to come, revenue recycling is a giant step backwards, squandering funds that could be better used to drive down the price of clean energy.
With the Lieberman Warner Climate Security Act (CSA) on the floor this week, senators from both parties are worried about how their constituents will react to higher energy prices. According to our calculations, this Kyoto-style cap and trade proposal would cost the average family of four, $2,360 a year. Some politicians are turning to "revenue recycling" as a way to offset these costs. Senator Bob Corker and Rep. Ed Markey have both introduced bills that would return auction revenue to households to compensate for higher energy costs.
Revenue recycling is a form of cap and trade that auctions pollution permits and then returns some percentage of the revenue to consumers each year. One such proposal, Sky Trust, would return 100 percent of the revenue to consumers. The money raised from auctioning the permits would be divided up equally between Americans at the end of the year, so each individual's dividend would be equal to the national average increase in energy prices. Under Sky Trust, if you chose to continue your normal energy use habits, you'd initially see a rise in prices, but you'd get all the money back at the end of the year. If you curtailed your energy use, you'd still get the same check as the guy who didn't, and you would end up making money.
Peter Barnes, a Sky Trust advocate, explains it this way:
[T]he revenue doesn't go to the government - it goes to all of us, one person, one share...
If you assume the atmosphere belongs to whichever companies grab it first, then cap-and-trade makes sense. If you assume the atmosphere belongs to government, then cap-and-auction is your choice. If you assume the atmosphere is a gift to everyone, then cap-and-recycle follows.
The way Barnes puts it, Sky Trust seems like progressive Robin Hood-ing at its best: tax the big polluters, give the money back to the people, and solve global warming in doing so. The sky belongs to all of us collectively, and it doesn't seem fair that big business or government should reap the profits.
But if we want to protect the atmosphere for generations to come, revenue recycling is a giant step backwards, squandering funds that could be better used to drive down the price of clean energy. Programs like Sky Trust rely on market forces to invest in renewables, assuming that as the carbon cap falls, pressure to switch to clean energy will rise. But there are major obstacles to creating a clean energy economy that only government investment can overcome. Private firms can deliver groundbreaking new solar panels or wind turbines, but these are orphan technologies if we don't have transmission lines to put them into use.
Unlike private firms, government is in a unique position to create these kinds of enabling infrastructure and technology. By removing infrastructure barriers, a major federal investment would set the stage for increased private sector investment, and drive innovation that addresses climate change on a global scale. Revenue recycling might seem like a fair way to help American consumers, but it could never have an impact in China, where emissions surpassed our own last year. For that, we need an investment-centered approach to make solar, wind, and other renewables cheaper than the coal that developing countries rely so heavily on.
Revenue recycling isn't just bad idea for the climate - it's also bad politics. Voters are nervous about rising energy prices, and they're not confident the money will be returned to them. In a recent survey [PDF] conducted by American Environics with the Nathan Cummings Foundation, barely 50 percent of respondents supported the Sky Trust proposal, and that support dropped to 24 percent after they heard arguments against it. "The key to passing substantive limits on carbon emissions is to couple those limits with specific policies to make clean energy cheaper," noted Jeff Navin, a political analyst who worked on the survey. "Unless advocates can address the real anxiety Americans feel about the cost of energy, passing substantive limits on carbon emissions will prove extremely difficult."
A better strategy is to use pricing mechanisms to fund investments in social goods that are directly related to the activity being priced; for the CSA, that would mean directing the majority of auction revenue to clean energy RD&D. As it stands, clean energy gets just six percent, while consumer rebates, at 31 percent, are the bill's second-largest expenditure.
Voters overwhelmingly support a strategy that invests to make clean energy cheap - Gallup found last year that 65 percent of voters support spending at least $30 billion a year to do it. And in the Nathan Cummings study mentioned above, 84 percent supported an Apollo-style investment centered approach. Even after attacks, a majority still supported Apollo. Revenue recycling doesn't deliver a good that is particularly salient to voters, but Apollo does: it gets us off foreign oil and closer to energy independence, it creates new jobs, and invests in future clean energy industries.
The solution is sitting right in front of us. Whether it's an auction, a carbon tax, or the various safety valve schemes proposed in most of the Congressional cap and trade legislation, there is a substantial revenue stream sitting there to be directed toward clean energy investment. The trick is to orient the proposals and messaging around delivering goods that voters actually want. It's win-win all around for Americans, the developing world, and the climate.
