Can Cap and Dividend Really Save the Economy or the Planet?

October 13, 2008 | Jesse Jenkins,

The economy is all that matters now, and climate advocates - and the
next President - would be wise to develop a strategic "Trojan horse" to
advance their ecological goals within the framework of economic
That's the thesis of "Save the Economy, Save the Planet," an article appearing in Slate last week by Eric Pooley. 

Pooley gets the political analysis right, accurately diagnosing the
potentially incurable political malady that dooms the chances of expansive
carbon regulation in today's economic climate.  But when it comes time
to prescribe the remedy, Pooley is off-the-mark, arguing that a Cap and Dividend proposal is just what the doctor ordered. 

Sorry, but that's the wrong answer.  Unfortunately, Pooley is not alone in his
prescribed solution, and it's time we took a close look at the
obstacles to climate action and see just how far Cap and Dividend gets
us (hint: it's not very far...)

Pooley, a longtime financial editor and columnist and a current Shorenstein Fellow at Harvard's Kennedy School of Government, starts his column with an accurate analysis of the political situation:

"[A]t this moment of deep economic distress, warnings about future climate
impacts aren't going to [be politically popular]. That much has been clear
since June, when $4-a-gallon gasoline helped snuff the Lieberman-Warner Climate Security Act
and the nation's hopes and dreams began shifting from save the planet
to "drill, baby, drill." Opponents of Lieberman-Warner claimed it would
jack up energy costs, throw people out of work, and kill the U.S.
economy; supporters responded that its impact wouldn't be that bad. Not that bad
is not that good a strategy, and green leaders realized then that if
they were ever going to break the political logjam, they had to drive
home a more optimistic economic message."

With the economy dominating the political arena, arguing within an economic revitalization framework is a huge opportunity - perhaps the only opportunity - to advance policies that will drive the key solutions to the climate crisis: the massive deployment of clean energy technologies and a dramatic increase in end-use energy efficiency. A clean energy economic stimulus plan could truly be climate and clean energy advocates' "Trojan horse," as Pooley puts it.

But not if they follow Pooley's advice about how to formulate that plan: continue to advance a full-on, economy-wide cap and trade program raising "$100-600 billion annually" (which translates into a CO2 price of $15-100 per metric ton at today's emissions levels).  Pooley recommends that $15 billion or so per year would go to clean energy R&D, but he argues that the vast bulk of the funds should be sent right back to energy consumers in the form of dividend checks "to make sure the fix doesn't cost too much."

These dividend payments, designed to cover the increased costs of
energy under the carbon pricing scheme, will some how make this bill
magically possible, Pooley claims.  Sorry, but this strategy, known as Cap and Dividend, is the wrong answer.

In order to succeed, any strategy to advance climate policy must overcome several very real obstacles.  Unfortunately, adding dividends to the mix while advancing the same old cap and trade scheme doesn't help overcome any of them.  Let's look at the facts...

Obstacle One: Public Opinion

Support for action on climate change is considered wide but notoriously shallow, and that's where Cap and Dividend is supposed to excel. 

As Pooley writes:

"Yes, putting a price on carbon, whether through a tax or cap-and-trade,
will drive up household energy costs in the short and medium term
before reducing them in the long term, as alternative energy comes on
line. Still, receiving an annual check from the climate bill's
allowance auctions might persuade some to support it."

So how many people need persuading?

Sadly, only eighteen percent of the American public expressed strong belief that global warming is real, that it is caused by humans, and that it is harmful, according to a poll
released last week and commissioned by the Alliance for Climate
Protection (Al Gore's folks) and a coalition of environmental groups. Eighteen percent!

The poll found a stark partisan divide among respondents as well, with
just 54% of Republicans polled even confirming that global warming is
happening, let alone that it is human-caused and requires action.

That's a long way from the strong public support needed to make high carbon prices politically sustainable, and that means there's a lot of heavy lifting for those dividend checks to do.

Surprisingly, Cap and Dividend advocates are hard-pressed to find any concrete evidence - beyond anecdotes about Alaska's popular oil royalty-funded annual rebate checks
- to support the assertion that the proposal is popular with the
public.  If anyone has hard numbers on Cap and Dividend's public
appeal, I'd love to see them, especially since this is the crux of the argument for a dividend scheme.

Unfortunately, the only public opinion numbers I've seen don't look good for Cap and Dividend. 

Those numbers come from a 2007 study [PDF] the Breakthrough Institute commissioned with the Nathan Cummings Foundation to test the public appeal of several approaches to the climate crisis, including a Cap and Dividend proposal.  Barely 51 percent of respondents
supported Cap and Dividend when it was tested. Furthermore, that support dropped to just 31
percent after respondents heard likely arguments against Cap and Dividend (respondents were told that the proposal would likely raise energy prices and result in a new government entitlement program).

So is Cap and Dividend the heavy lifter with the public we need?  It doesn't look like it.

In contrast, polls have found consistent and deep support for actions to address economic insecurity, foreign energy dependency and increasing energy prices.   The same 2007 study found that 85% of those polled supported a $300 billion, ten year investment to develop low-cost clean energy technologies and industries.  Support stayed at 54% even after arguments were made against the Apollo-project style clean energy investment plan (respondents were told that there was no plan to pay for the proposal, increasing either taxes or deficit spending, and that despite spending hundreds of billions, the proposal wouldn't require polluting industries to reduce emissions).

At a time of economic recession, wouldn't public investment programs designed to
directly stimulate the economy with investments in clean energy technology draw significantly greater
public support than an effort to sugar-coat a carbon pricing program with dividend checks?

Obstacle Two: Elite Opinion (aka the "Technology Sixteen")

As we reported last week, sixteen Democratic senators we've dubbed the "Technology Sixteen" are aligning themselves to take control of the climate debate.  These sixteen Democrats have all voiced substantive concerns with the cap and trade approach advanced by climate advocates this summer and indicated that they would have voted No on the failed Lieberman-Warner bill.  Given the fact that this new gang of senators represents almost one third of the Democratic caucus in the Senate, the concerns of the Tech Sixteen must be addressed if climate policy has any hope in the United States Senate.

That presents a big problem for Cap and Dividend advocates.

To start with, the Tech Sixteen are far more concerned about the impacts of carbon pricing on their business, industry, labor and ag constituencies than they are with the cost to end-use energy consumers.  That's why the Tech Sixteen are primarily concerned with cost-containment, technology development and deployment, and perks for the special interests in their districts (i.e. eligibility for ag sector offsets, incentives for utilities and manufacturing, etc.) - not on securing dividends for consumers.

The "Tech Sixteen" want to see a low carbon price and more spending on efforts to make clean energy cheap.  So tell me how we get this critical block of senators to support a Cap and Dividend proposal designed to enact the highest carbon price possible and rebate nearly all of the revenue to consumers, leaving very little to spend on clean technology development and deployment (let alone their special interest constituencies)?

In short: it's hard to see how Cap and Dividend will sweeten the pot at all with the critical Tech Sixteen.

Obstacle Three: Effectiveness (aka the Market Fundamentalist Myth)

Finally, all this talk about Cap and Dividend is premised on the argument that we simply need a high price on carbon to correct market failures, driving the deployment of clean energy technologies and increased end-use efficiency that is the end goal.

Unfortunately, this is simply a market fundamentalist myth.  

The "carbon pricing will save us" myth ignores the critical role government frequently plays in deploying enabling infrastructure (just consider for a moment the effects of rural electrification and the interstate highway system on the economy we take for granted today); driving technology innovation (while the Apple I may have been soldered together in Steve Wozniak's garage, the technologies that enabled the personal computer and the internet revolution were all developed in government labs); and supporting strategic emerging industries (e.g. incentives for emerging biomed and nanotechnology industries).

And just how high a price would you need to drive major increases in end-use efficiency or conservation? 

Well, you'd need to have a CO2 price of $113 per ton to increase gasoline prices by just $1 per gallon. In the past two years, we've seen prices skyrocket by $2 dollars per gallon and yet have seen just a tiny dent in gasoline consumption (and emissions). So you have to ask yourself, what price will be sufficient to drive deep emissions reductions in the transportation sector?

Again, wouldn't it be smarter to focus directly on incentives to electrify transportation and get Americans and their stuff out of cars, planes and long-haul trucks?  We could make investments to help Detroit retool to produce the most advanced vehicles in the world, support the mass development and deployment of plug-in hybrid electric vehicles, and build new high-speed electric rail and functional mass transit systems, and reinvest in efficient freight rail.  And that's a strategy with direct economic benefits.

All this argues not for higher carbon prices but for more investment ... and again, that's a function not very well served by Cap and Dividend.


This economic crisis does present a key opportunity to advance critical investments in clean energy and energy efficiency. But a Cap and Dividend scheme is still a non-starter in the halls of the U.S. Senate - not to mention with the US public. 

Today, we face an urgent moment: a new political climate is unfolding, a new president will soon be elected, and
a ticking clock of climate feedback loops is winding down.  We simply cannot afford
another run through the U.S. Senate with a climate bill doomed to
failure from the start.

For those who feel the urgency of our climate crisis as I do, we now
face a critical time to (re)assess the current political climate and
seize on any opportunities to advance real solutions it may present.

Our best hope would seem to be to advance a package of strategic investments framed explicitly and primarily about economic recovery and job creation. 

If a clear economic imperative exists, we are apparently willing to put $700 billion (and counting) of taxpayer dollars on the line. There simply does not
exist, nor will there exist any similarly strong political imperative
motivated by climate concerns at any point in the near future. So we
have to look elsewhere if we want to advance solutions to our climate
crisis and find a real Trojan horse.

What we need is a new clean energy-focused economic recovery bill, not the next incarnation of a climate bill.  In today's political climate, that seems to be our best, if not only, option. 


Here's the next post in this continued dialog with Eric Pooley:

By Jesse Jenkins on 2008 10 17

Nick, before you entirely dismiss this twenty-four year old policy wonk, please read my continued dialog with Eric Pooley here. I think you'll find I've put plenty of thought into these ideas, and my position is open to both discussion and refutation. Few other discussions are more critical given the state of our economy and our climate, and the political opportunities marked by what will no doubt be an historic election in just a few weeks. Flat out dismissing it with a frankly insulting appeal to authority just doesn't do it justice.

By Jesse Jenkins on 2008 10 17

I think I'll side with the "longtime financial editor and columnist and a current Shorenstein Fellow at Harvard's Kennedy School of Government" over the 22-year old kid who'll shill whatever ideas Nordhaus and Shellenberger plant in his head (not matter how stubborn and close-minded).

By Nick Stern on 2008 10 17

Jesse, you and I have a basic disagreement. I think a mandatory declining cap on GHG emissions is essential, and you don't. That's fine, but then you go on to disagree with me on some points I never make. I don't advocate "a Cap and Dividend proposal designed to enact the highest carbon price possible and rebate nearly all of the revenue to consumers, leaving very little to spend on clean technology development and deployment." As a matter of fact, I don't think the carbon price needs to be sky-high to drive clean tech.(But unlike you, I do think a carbon price is a crucial accelerator.) Apparently, since I refer to Peter Barnes in my column, you assume I advocate for all of his policies; that's reading way too much into one name-check. I do agree with Barnes' basic argument that consumers must be cushioned from energy price increases that result from cap-and-trade -- and so do a good many Democrats and Republicans in the House and Senate, so we'll see how the politics play out. You argue that creating such a cushion wouldn't leave enough money for cleantech RD&D. I think you are wrong, and I think you create a false choice -- either a cap or a huge investment in clean technology. I'm in favor of both, and in favor of using the former to finance the latter. Having looked hard at the numbers, I'm convinced that a cap-and-trade bill can raise enough money for both RD&D and consumer relief, without resorting to a sky-high carbon price. By the way, how do you propose we raise the necessary cleantech RD&D money? What's your magical funding mechanism?

By Eric Pooley on 2008 10 14