Cap-and-trade could send $1,000 per year to California families

If climate change legislation fails in the senate — an increasingly likely proposition — focus will shift back to regional initiatives. The most far-reaching of these efforts is California’s cap-and-trade program, which begins in 2012. An advisory committee charged with making recommendations regarding the design of California’s emissions trading system recently proposed that most of the cash raised from the sale of pollution allowances be rebated back to households (pdf):

> The [Economic and Allocation Advisory Committee] recommends a “household friendly” approach to carbon regulation by suggesting that the majority of allowance value derived from California’s cap-and-trade program be returned to households. The Committee, which was split on the mechanics of providing allowance value to households, suggested two different options in their report. Allowance value could be provided either in the form of tax cuts or avoided tax increases, or in the form of a lump-sum payment directly to households.

> Particular attention is recommended for low-income and disadvantaged communities to ensure they are not disproportionately affected by the program. Remaining allowance value is recommended to be used to ensure a level playing field for California’s workers and industries and for public purposes that will also benefit consumers, including energy efficiency programs, research on clean technologies, climate change adaptation measures, and environmental remediation.

According to the Times, the rebate could amount to more than $1,000 per year for a household of four.

I’m a fan of these sort of rebate schemes. The Waxman-Markey bill also sends the majority of funds raised back to citizens through a much more opaque mechanism involving utility rate adjustments and energy efficiency programs. The California proposal has the benefit of simplicity and (probably) greater fairness. More important, though, is the fact that the advisory committee has recommended full auctioning of allowances, which means that there will be more money to distribute.

The reason I like these rebate programs, aside from basic questions of fairness, is that they make a high carbon price more politically palatable. Regardless of what the science suggests is needed, the public (and therefore politicians) will only let the cost of climate change legislation get so high. But under a rebate scheme, most households will actually do better the higher the price of carbon rises. (Along these lines, I ran a thought experiment a while ago on what would happen if carbon reached $2,000 per ton.)

Of course, a recommendation from an advisory committee is just that: a recommendation. Business groups will no doubt push back on these provisions, and the entire cap-and-trade bill in California is now under attack via ballot initiative. This will be one to watch closely.

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