I have been reading a lot on cap and trade systems lately. One especially fine paper by James Boyce, an economist at the University of Massachusetts, Amherst, shows how a cap, trade and rebate system could actually improve the economic well-being of the majority of Americans by putting extra money in the pockets of the working majority.
Everyone knows that putting a price on greenhouse gases (GHG) is bound to reduce the living standards of working Americans for the simple reason so much of what we buy and use generates GHGs. A tax on carbon or a cap and trade system is, sad to say, an regressive tax that hits low income earners that hardest because a greater portion of their income is spent on carbon intensive goods and services than among higher income earners. Boyce and his team at U Mass show how pricing carbon leads to the double dividend of putting a price of carbon, thereby creating incentives for polluters to reduce carbon emissions, while redistributing income from high to low income households to reduce the pinch of pricing carbon on poor people.
The idea that we can price carbon and promote fairness in the distribution of economic well-being at the same time is wonderful. Don’t get me wrong: I am such an extreme egalitarian that I am happy to see a great deal of the earnings from cap and trade flow down the income ladder in a highly progressive fashion. But I can’t help thinking that the common property of the people – the atmosphere – can not only be a source of earnings for ordinary people via a commons-based cap and trade system but that the sky trust could in turn be a source of venture capital financing new technologies which, over time, earn spectacular returns of their own. I not only want the people to own and earn from common ownership of the atmosphere, I also want them to earn royalties from the technologies that clean up the planet.
I know this sounds crazy, but it is really not such a stretch when you think about it.
We all know – or at least hope – that pricing carbon and other GHGs leads to an explosion of technological innovation that gradually reduces human induced global warming to levels that stabilize and reverse global warming. Most of these innovations are going to be created by small (even one person) and medium sized enterprises willing to tackle the technical and scientific challenge of actually cutting GHG emissions. The trailblazers are going to need financing and encouragement by venture capitalists who can not only spot good minds and promising projects, but are patient enough to wait for scientific crap shoots pay off.
Contemporary capital markets are, well, not very good at taking the long view in matters of risk financing of long term, science-based development projects. (Of course, modern capital markets do not seem to be very good at pricing or managing all sorts of risk – consider the subprime mortgage mess and the awful housing bubble, not to mention the inevitable horror show following on the dollar’s collapse on global markets. So much for efficient markets.) Many promising but long-term projects may be overlooked in favor of surer deals promising quicker returns pandering to Wall Street’s myopia. Other good ideas will be snapped up by mammoth corporate giants intent on gaining a stranglehold on technologies that reduce GHGs, thereby establishing control over the economics of GHG reduction and the enormous profits therefrom.
It would be wise for Americans to reward independent innovation by investing in new technologies that clean up our production system. There are simple methods for financing innovation in bold GHG reducing technologies that would grant the people long-term royalties from licenses to the use of patented technologies. It would not be terribly difficult for bright lawyers, accountants, financial managers , and above all, scientists and engineers to create venture capital mechanisms to finance innovation in an efficient manner. Nor would such a system be particularly expensive. I have seen estimates of revenues from cap and trade systems that run from $100 to $500 billion per year, so channeling 5% or so of these funds to financing innovation – $5 to $25 billion per year – is not asking a lot.
Socialism? Not at all! I am proposing that we use a portion of the proceeds from cap and trade to create a network of collectively owned by privately managed venture capital enteprises that compete to find, nurture and develop new technologies and enterprises. Who could possible object to the American people using a bit of the bounty from pricing GHGs to help green capitalists get rich by cleaning up the mess made by dirty capitalists? Gives new meaning to the idea of “shareholder democracy”, doesn’t it?