How it works 3 - Compensating Consumers

Step 3 – Compensating Consumers

Once a cap on emissions is set, and the allocation mechanisms have been considered, the next step is deciding what to do with the value represented by the allowances. (This was termed "Allowance value provision" by California's Economic and Allocations Advisory Committee.")

What to do with the revenues?

If you plan to auction the permits, you have to decide what to do with the revenues. The choices include:

1) Cap and Invest: This entails using the auction revenues to fund public goods such as energy efficiency, renewable energy, R&D, green jobs,or other projects to reduce more greenhouse gases.The public goods investments can accelerate GHG reductions and ease the transition to low-GHG technologies and lifestyles.


2) Cap and Dividend: Here revenues are returned back to consumers as a cash dividend. The consumer rebate compensates for higher fuel or energy prices, helps low-income consumers who spend a larger share of their income on fuel and electricity, and embodies the idea that the sky is a Commons we all share.

(Note: Another option is putting the money into the General Fund or use for general tax cuts. This will be discussed later.)

In a perfect world, there would be no trade-off between environmental and equity goals, and a dollar spent on investments in green projects would not come out of money to compensate consumers. Unfortunately, there is a debate between these perspectives.

Here are some arguments for and against Cap and Invest and Cap and Dividend:

Cap and Invest: Spending Revenues on Energy, R&D, or other projects Consumer Compensation: Dividends or Shares


Revenues are used to fund additional energy and environmental projects such as:
•  Energy efficiency, solar incentives
•  Public transit (trains, transit, infrastructure)
•  Research and development for new technology
•  Helps achieve climate protection goals
•  Only government can fund large infrastructure projects such as transit.






Consumer compensation helps households deal with higher energy prices through a per capita dividend, rebate, or share.
•  Protects consumers: Limiting carbon emissions will necessarily raise fossil fuel prices. These higher prices can be offset by distributing ‘dividends’ or ‘carbon shares.’  
•  Addresses regressivity: Failure to offset higher prices will harm the economy and low-income households particularly.
•  Avoids the “pork barrel”: Returning money to consumers avoids funding pet projects, or questionable projects (nuclear, ethanol)
Makes carbon cap politically feasible: A dividend could prevent a consumer backlash at high fuel and energy prices that would otherwise allow political opportunists to undermine the program.

•  Large government expenditures should follow the normal budget and appropriations process.
•  Transit can be funded by diverting highway funds.
•  Solar can be funded by diverting oil subsidies.
•  Trillions can be invested in green jobs and efficiency by ending the War in Iraq, and diverting military and homeland security expenditures.
•  Carbon fees and “feebates” are an additional source of funding.
•  Government has a mixed history of choosing technology winners (ethanol?  the “Supercar?”), and the process is often co-opted by politically powerful lobbies such as ethanol, nuclear, or “clean coal.” 
•  Government purchasing can drive down prices of existing technologies, without the need to spend auction revenue.


•  Are dividends "wasted" on high income people? What if people spend their Dividend on Hummers or vacations which increase emissions?
•  Shouldn’t all revenues go toward reducing emissions?

(Answers to these and other questions may be found on the FAQs page)






Here are additional arguments against using auction revenues to invest in good green projects, called “Showstopping reasons to not spend the revenue” on anything other than dividends, adapted from a presentation by Dr. Holmes Hummel of UC Berkeley's Committing a Carbon Trust: The Trillion Dollar Bargain.

  • Major programs are better funded through annual appropriations, government purchasing priorities, changes in subsidies and expenditures, and fees rather than auction revenues. Carbon fees are more predictable than allowance prices, and allow for easier planning of project budgets. Fees and caps can co-exist.
  • Other funds are available for spending on emissions reducing programs. In California, money is being continually invested in the parking structures, new highway lanes and widening roads, resulting in higher GHGs.
  • Anything you could fund with auction revenue wouldn’t start until 2013.
  • The price signal needs to endure while spending priorities will change. The two decisions should be kept separate, not combined.
  • Lobbyists will take as much as they can get away with, leaving those without a strong voice in Sacramento with nothing. Some questionable projects have strong lobbyists (ethanol, clean coal, nuclear, etc.) and could overwhelm better projects that have weaker lobbyists.
  • A carbon price will affect household budgets, and if the money is not returned, it will be labeled “raising taxes,” and spur a “taxpayer revolt.”
  • Competing claims are strong: National debt, education, and liability to elders and veterans. Once politicians see revenues being spent, it will be tempting to “borrow” from those funds.
  • But when you try to protect auction revenues from the appropriations process, you create “the mother and father of all earmarks.”
  • No matter how much money you spend on compensation, it will never be enough for the fossil fuel companies being driven into new product lines. They will still complain they need to be made whole, but that money would be coming from the poor people into the pockets of the wealthier people (shareholders).
  • If you spend a large proportion of the money (rather than return it), fossil interests will exploit distributive claims and prevailing distrust of government to destroy the policy within a matter of a few election cycles. The best defense for the policy is to engage those households directly (i.e. provide a dividend).

Why consumer compensation: Consumer compensation acts as a rebate for the higher fuel or energy prices which may result from a carbon cap.

Economic justice: Consumer compensation on a per capita basis would institutionalize equity and address disproportionate impacts to low-income households. Limiting carbon emissions will most likely raise fossil fuel and electricity prices. This is regressive, and disproportionately impacts low-income people, since low-income households spend a greater portion of their income on necessities like fuel. But the overall amount they spend is typically lower than high-income households.

The Commons: The distribution of per capita rebate, dividend, or share goes beyond the idea of mitigating the impact or burden of changing to a low-carbon economy to specific groups. The per capita framework institutionalizes the idea that we all share ownership of the commons together, and that wealth should be shared with everyone. It enshrines inclusiveness and equality, some of America’s highest values, into our economy. This is why dividends or shares to middle-income and high-income Americans is not wasted. It is based on the idea that the rights to use the atmosphere belongs to all people, equally, not to emitters or the government.  Consumer compensation may be key to maintain political support for the cap over time.

Why per capita:  Equal per capita compensation addresses the regressive impacts of fuel price increases. If consumers are compensated on a per capita basis, this would help low-income consumers, since they spend a greater portion of their income on fuel and electricity. This is the economic justice component of consumer compensation. Additionally, low-emitting individuals from all income groups will come out ahead at the end of the year, but high-emitting individuals will pay more than they receive.

A percapita framework:

• is based on equity.
• is universal, not divisive.
• is the basis of our country: “All men are created equal.”
• is easy to understand and other states may adopt it.
• avoids complicated or subjective set-asides (for low-income, or special groups) but accomplishes the same goal: equity in emissions.


Auction revenues should be used for consumer compensation through dividends, rebates, or shares. Important investment projects should be funded with carbon fees, redirecting subsidies, and other climate policies.

Next: Dividend or Share?




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