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Cap and Dividend is a variation of the cap and trade system of carbon pricing. Similar to cap and trade, a cap on emissions would be put in place. The cap would decrease over time in line with the target reduction of emissions. Furthermore, a number of permit or allowances would be generated based on the initial target. As the cap declines, the number of permits generated or issued decreases accordingly. Unlike cap and trade, where permits would be given for free, here the permits would be auctioned at points of entry of carbon into the economy such as oil wells, gas wells, coal mines and the border. And, finally, the entire or most of the revenue generated by the auction would be distributed equally among households.1,2
Cap ‘n Dividend by Cap&DividendTV gives simplistic overview of how Cap and Dividend system would work.
The distribution of the auction revenue equally to households or individuals (or dividends) would reverse the potentially regressive nature of carbon pricing. Without dividends, lower income households will be disproportionately negatively affected as a result of the increase in cost of living. Studies on cap and dividend in the US scenario have suggested that the lower three income quintiles will experience a net positive effect. For example, the poorest 20% of the families would have a 14.8% income gain with a cap and dividend system (shown below).
Net impact of cap-and-dividend on family incomes by income quintiles
1. Heyman, G., & Campbell, C. (2009, May 7). Towards an effective and fair carbon reduction strategy — Sierra Club BC. Sierra Club BC. Retrieved August 18, 2014, from http://www.sierraclub.bc.ca/media-centre/press-clips/towards-an-effective-and-fair-carbon-reduction-strategy
2. Boyce, J. K., & Riddle, M. (2007). Cap and dividend: How to curb global warming while protecting the incomes of American families. Amherst, MA: Political Economy Research Institute. Retrieved from http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_101-150/WP150.pdf