The other day, I used the fanciful example of $50,000 utility bills to illustrate how cap-and-rebate schemes can inspire energy efficiency and conservation. The numbers were deliberately exaggerated, but they highlight one of the features of cap-and-rebate that I like: the robustness of the system in the face of higher carbon prices.
The political battle over climate change legislation is mostly a battle over cost. Who pays and how much? Even the arguments that seem to turn on fine policy points (safety valves, offsets, circuit breakers, permit auctions, etc.) really boil down to cost. While a high price of carbon isn’t per se a goal of effective climate legislation, a high price may nevertheless be necessary to bring down carbon emissions quickly and steeply. A good system will accommodate high prices without exploding.
Americans have an average carbon footprint of 24 tons per year. As a thought experiment, imagine I offered you the following deal: every year, I’ll charge you $2,000 per ton of your personal emissions. I’ll also offer you a guaranteed $48,000 annual rebate. Would you take the deal?
I bet most Americans would. Think about the behavioral changes that would follow. Every gallon of gas now costs you about $20. Of course, you’ll be able to afford it because I’m handing you a huge check every year. But that Prius is starting to look a lot more attractive, to say nothing of your bicycle. A single cross-country flight is now going to set you back about $2,500. Again, you can swing the expense. But is there something else you’d rather spend $2,500 on? Maybe it’s really important for you to spend Christmas with your family. Or maybe you can send them an e-card.
Of course, we’re not going to see a $2,000 per ton carbon price in my lifetime, which is a good thing. For lots of reasons, such a high price would in fact cause the system to explode. But, at least in theory, most consumers could bear it pretty well under a cap-and-rebate system, and might even end up significantly richer. Given that $100 per ton of carbon might not be too far off, a rebate will not only ease the pain for taxpayers, it will also ease the pressure on our political system to sacrifice the environment for short-term relief.