04/10/2009 05:12 am ET Updated May 25, 2011

Cap And Dividend Defined: The "Third Way"

Enter the Great Third Way, more formally known as cap-and-dividend. The cap part is familiar--a set number of pollution permits would be auctioned off, placing a firm, predetermined, and annually-dropping ceiling on carbon emissions. Cap-and-dividend's first twist away from the typical cap-and-trade orthodoxy comes in where, exactly, the carbon is capped. Historically, cap-and-trade systems--like the acid rain program that so effectively reduced sulfur dioxide in the early 1990s--place a cap at the end of the industrial cycle, where the pollution left the smokestack. That's easy enough to do when there are relatively few factories and plants emitting SO2.

Carbon's different, and more difficult, because it gushes not only out of tens of thousands of power plants and factories, but also from hundreds of millions of furnaces and tailpipes. For this reason, Peter Barnes--founder of Working Assets and perhaps the country's most vocal champion of cap-and-dividend--emphasizes that the cap must be placed on "upstream" industries, or the first producers of fossil fuels like coal mines and oil refineries.

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