Cap and Dividend is a market-based trading system which retains the original capping method of cap and trade, but also includes compensation for energy consumers. This compensation is to offset the cost of products produced by companies that raise prices to consumers as a result of this policy.[1]
The process begins with some government or group in power setting carbon emission caps to a number of large companies that produce significant amount of carbon emissions. As a result of these companies buying carbon caps, their products will become increasingly expensive to consumers. With this process, the capped companies are permitted to go over the cap as long as they pay a dividend. The dividend in the cap-and-dividend system will be paid back to consumers as reward for consuming low amounts of carbon. The dividend payments will be derived from the cap sales for these carbon conscientious energy consumers.[2]
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The goal of this type of pseudo-carbon tax is to reduce carbon emission rates to a point of nearly leveling. This is similar to the cap-and-trade system, with the main difference being energy consumers who reduce their own carbon emissions receive dividend payments from the original cap purchases.[3] The addition of a dividend will affect everyone in the marketplace, whereas cap-and-trade's intention is to affect everyone except consumers. The Healthy Climate Trust Fund is the agency in the U.S. government who are overseeing the cap-and-dividend policy. They will accomplish this by collecting and distributing the funds from the capping process.[1]
Provided are convenient definitions pertaining to cap-and-dividend:
Cap-and-dividend is an approach to reducing greenhouse gas (GHG) emissions. The concept is simple: a limit or cap is placed on greenhouse gases from certain sources; these sources are required to obtain permits to cover their greenhouse gas emissions and dividends from the sale of the permits are returned directly to consumers through rebates or tax credits to compensate for increased energy costs. The cap is typically placed on 'upstream' sources – like fossil fuel suppliers – to cover the carbon content of the fuels they distribute. Some limited trading may be allowed, but typically only among covered sources.[4]
For definitions on Cap-and-Trade, look here: Emissions trading
The history of the cap and trade system is very recent; it was created and is especially relevant in the political world recently.
Not much is known about who first thought of the idea, but most likely the idea came from multiple sources as an answer to the problems of cap and trade. It was, popularized by California's Peter Barnes (entrepreneur) and such groups as On the Commons, a network group which promotes environmental, community-related solutions.[5]
Chris Van Hollen (D-Md.) put a bill before Congress on April 1, 2009, pertaining to carbon reductions and including the cap and dividend system. The cosponsors of the bill are Rep Earl Blumenauer [OR-3], Rep Lloyd Doggett [TX-25], Rep Mike Thompson [CA-1], Rep Lynn C. Woolsey [CA-6].[6]
The goals of the Cap and Dividend Act of 2009 are as follows:
This bill would also create the Healthy Climate Trust Fund, the potential agency for managing and distributing dividend funds.[6]
The status of the bill included a referral to House Ways and Means Committee on 4/1/2009, then a referral to House Energy and Commerce Committee also on 4/1/2009, and then on 4/2/2009 a referral to the United States House Energy Subcommittee on Energy and Environment. The bill is currently being reviewed by the United States House Energy Subcommittee on Energy and Environment.[6]
Cap and dividend, like cap and trade, would have had a direct impact on the economy. With a policy like this it will affect not only the major companies that will be taxed but also every household through a chain reaction of product price increases. There will be variations on how much of an impact this policy would have on different geographical areas based on population and how industrialized the area is.[8]
Caps will be placed on carbon emissions and every company that use carbon-based fuel to produce some sort of product will have to buy carbon permits. In the cap and dividend policy, every company will have to buy a carbon permit and this differs from the cap and trade policy because there will be no permits given away for free.[1] The permits, collected by the government, will then be used to account for the dividends given back to the people. However, because of the permits' cost, the companies will be forced to raise the prices of their products so they can still make profit.[1][9] The price increase will be felt by all customers of these various products.
The cost of everything made using carbon-based fuels will increase and will be felt by everyone. However, the people most affected by the price increases are the people emitting more carbon. For example: Someone that drives a Hummer is going to have to buy more gas, which the price is increased as well, than a family that drives a fuel-efficient car.[8] Every month the government will automatically send a dividend to offset the cost of the high prices. The people that conserve the most and produced the least amount of carbon emissions will get a bigger dividend than a person who has been producing a large amount of carbon emissions.[1]
There have been numerous ideas and attempts to reduce the amount of carbon emissions. Policies have been proposed and rejected. One of the policies that has been actually used is known as the cap and trade system. It is currently being used in Europe and has influenced the people living there. [3]
There are several differences between cap and trade and cap and dividend that ultimately define each of them. A cap is placed on carbon emissions and green house gas (GHG) emissions in both policies. Based on the caps there are carbon emission permits that give the companies the ability to produce more carbon emissions then the cap would permit. These permits are auctioned off to different companies. In the cap and trade system only a set amount are auctioned off and the rest are given away for free. In the cap and dividend system all the permits are auctioned off. In both systems the cost of buying the permits will increase the price of the product made by the companies; oil, electric, and products that make carbon emissions. The thought process behind this is to dissuade the purchase of mass quantities of these products i.e. less carbon/GHG emissions. [3] While the cap and trade system uses the high prices to control the amount of carbon emissions they do not provide a good incentive to limit carbon emission. Cap and dividend uses the dividends to reward the people that conserve the most. This will benefit the poor the most because of their living situations and this is found to be a problem with lots of people critiquing the policy. [6]