Cap and Dividend Carbon Trading Model

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This excerpt is from Peter Barnes new book Climate Solutions: A Citizens Guide (Chelsea Green). His 2001 book Who Owns the Sky? presents the Cap and Dividend Carbon Trading Model or Skytrust model in detail.


Via On The Commons.

Peter Barnes:

“Carbon capping comes in three varieties: cap-and-giveaway, cap-and-auction, and cap-and-dividend. All start with descending caps. The differences among them lie in who pays whom, and how leaky the caps are. In cap-and-giveaway, permits are given free to historic polluters. This is called “grandfathering.” The more a company polluted in the past, the more permits it gets in the future—not just once, but year after year. As the descending cap raises the price of fossil fuels, everyone pays more, and the companies that get free permits keep this extra money. Their profits and stock valuations soar, while energy users bear the costs.

In Europe, a carbon cap-and-giveaway program handed billions of Euros in windfall profits to a few large utilities. In the U.S., an MIT study estimated that grandfathering permits to American utilities would give them hundreds of billions of dollars in extra profits every year for several decades—a staggering amount of money that would ultimately flow to their shareholders.

In cap-and-auction, permits are sold to polluters, not given away free. Permit revenue is collected by government rather than private corporations. What government does with the money is then up to public officials. It could be used to speed the climate transition, though there are no guarantees.

In cap-and-dividend, permits are also sold, not given away free. However, the revenue doesn’t go to the government—it comes back in the form of equal dividends to all of us who pay it. This revenue recycling system is sometimes referred to as a sky trust.

A cap-and-dividend system, or sky trust, is a way to reduce carbon dioxide emissions without reducing household income. How you’re affected depends on what you do. The more energy you use, the more you pay. Since everyone gets the same amount back, you gain if you conserve and lose if you guzzle. Thus, the “winners” are everyone who conserves fossil fuel—plus our children who inherit a stable climate.

The premise of a cap-and-dividend system is that the atmosphere belongs to everyone equally. Its central formula—from each according to their use of the atmosphere, to each in equal share—is fair to poor, middle class, and rich alike. The poor benefit most, however, because they pollute the least.

From a political perspective, a carbon cap with monthly dividends would be the most popular federal program since Social Security. It would lock in popular support for emission reductions no matter how high fuel prices rise. On top of that, it would take politicians off the hook for rising prices. If voters complain, politicians can say, “The market sets prices, and you determine by your energy use whether you gain or lose. If you conserve, you come out ahead.”

To make sure the cap is airtight, there’d be no safety valves or substituting of offsets for permits. To prevent stalling or backsliding, the rate at which the cap descends would be set at the outset by Congress, or delegated to an independent trust. To protect U.S. manufacturers and workers, carbon border fees would be added to imports from countries with low carbon prices. We must also change government priorities. This requires cutting subsidies to fossil fuels and investing in clean energy instead. It also requires higher efficiency standards.” (


Bill McKibben interviewed Peter Barnes on the occasion of Obama's endorsement of the scheme.

FORBES: Isn't this a hidden tax? Wouldn't an out-in-the-open tax be more honest? Barnes: It's like a tax in the sense that it raises the price of carbon--something we simply have to do if we're going to kick our carbon-emitting habit. I mean, the reason Europeans use on average half as much energy as we do is because they pay twice as much.

But it's not truly a tax, because the government doesn't keep any of the money. It's basically a money recycling system in which we pay as polluters and get money back as owners of the air.

So Exxon's going to raise the price of gas and Consolidated Edison the price of power. Do I come out ahead or behind?

That depends on what you do. Since everyone pays according to how much they burn and gets back an equal share of the pot, you lose if you guzzle and gain if you conserve. Gas prices might go way up, but if you took the bus, you'd be a net winner. That's fair to everyone and especially to the poor. They come out ahead on average because they burn less carbon than others. In fact, about half of Americans could come out ahead.

What kind of numbers are we talking?

Well, the Congressional Budget Office estimates that auctioning permits will raise between $100 billion and $300 billion a year. It depends how stringent the cap is. At $300 billion, that's $1,000 per man, woman and child. A family of four would get $4,000.

Okay, I want my check. Who are the opponents?

There are supporters and opponents on both sides of the debate. Many liberals would like to spend auction revenue on government programs. Obama has said he'd let Congress keep maybe 15% to help finance new energy technology. And some conservatives would rather not do anything about climate change at all.

The biggest opponents, though, may be utilities and other energy companies. They don't worry about the caps as much as they do the plan to auction the permits--they want to get them for free. Which is understandable; after a couple of centuries of subsidy, they're used to government largesse. But if their lobbyists prevail, it will be the biggest government giveaway in American history. And none of the rest of us will get a check." (


Open Letter to President Obama

Peter Barnes:

"2009, you must do the same for climate change. You must create a simple, transformative and unsinkable climate protection system that, over thirty to forty years, squeezes carbon out of our economy and replaces it with clean alternatives.

The essence of such a system isn’t complicated. In your campaign, you pledged to install a descending cap on carbon emissions with a goal of 80 percent reductions by 2050. Unlike John McCain, you insisted that polluters pay for all the permits they’ll be required to obtain. And you said that most of the money polluters pay should be returned to families to offset the inevitable increase in energy prices.

Those are exactly the right core principles: cap carbon, make polluters pay, and return the money to the people. But here are the fine points that will en-sure your climate system is as effective, popular and enduring as Social Security:

• Cap carbon upstream as it enters the economy, not downstream as it escapes from millions of pipes. This will assure that the cap actually works.

• Return all the polluters’ payments equally and automatically to everyone. That way, the system will be transparent and special interests won’t game it.

• Return the polluters’ money monthly, not annually, because people have monthly bills to pay. To keep administrative costs down, wire these ‘climate dividends’ electronically to people’s bank accounts or debit cards.

• Tax the monthly dividends at ordinary rates, just as Social Security benefits are taxed. Rich folks will pay at the highest rate, while poor folks won’t pay at all. The government will then get a share of the polluters’ money that it can use for clean energy programs. But the people will get their share first.

Yes, Americans will scream when energy prices go up, and there’ll be frenzied cries of ‘Drill, baby, drill!’ But by returning polluters’ money equally to every-one, your carbon capping system will retain public support for its duration.

In addition to solving the climate crisis, a cap and dividend system will protect household buying power during (and beyond) the recession, as well as rebut any charges that you’re raising taxes on the middle class. More importantly, it fits your vision of how government should work. It’s simple and market-friendly, yet favors no special interests. And by treating all Americans as co-owners of the air, it unites us for the common good.

A cap and dividend system is good politics, good economics, and essential for healing the planet. If you enact it, it will be a signature achievement and remain as memorably linked to you as Social Security is to Roosevelt." (

Reprinted from Tikkun magazine, January 2009

More Information

  1. 90 second flash animation at