08/31/2009 05:12 am ET Updated May 25, 2011

Could Dividends Help North Dakota Say "Yes" to a Carbon Cap?

A recent article on the New York Times website via ClimateWire implied that North Dakota may hold the key to Senate passage of a U.S. climate bill version of HR.2454 (also called ACES).

I found this interesting because my research at UCLA showed that North Dakota could face the highest average carbon cost from electricity in the 50 states. They have very high per capita energy use, partly due to the cold climate. The average ND household consumed over 12,000 kwh in 2005, twice that of the average California household. ND's coal in their electricity mix leaves them with the highest carbon intensity per unit of electricity. But coal is cheap, so in 2005 ND only paid about 7 cents per kwh, while Californians paid over 12 cents per kwh (a carbon price could change this).

So we should not be surprised to find North Dakota's senators a little sensitive about the costs of climate action. In a recent op-ed in the Bismarck Tribune, Senator Byron Dorgan gave his reasons to worry about unregulated carbon markets. Dorgan stated:

"I'm willing to cap carbon to address the threat to our environment. But it has to be done right. I will support a plan that establishes workable caps, invests in technology to decarbonize fossil fuels and sends the majority of the revenue raised to consumers to offset increases in the price of electricity resulting from the caps."

He also said he wants the program to "...use the majority of the revenue from a plan that caps CO2 to provide refund payments to those who would otherwise experience increased energy costs."

This seems to place Senator Dorgan in the Cap and Dividend camp, those who advocate for returning revenues back to the people, rather than giving out free allowances to utilities or spending permit auction revenues on government programs.

The Democratic leadership, with the exception of Rep. Chris Van Hollen, have decided against the Dividend, in favor of a strategy that 1) hands out allowances to utilities and other powerful lobbies, and 2) hopes carbon costs will remain low (the so-called "postage stamp a day"). Since Dorgan's op ed veers from this strategy, he was immediately attacked by economist Paul Krugman and Climate Progress' Joe Romm.

When Congressman Earl Pomeroy (D-ND), voted no on the Waxman Markey bill in the House, he stated,

"[Because the coasts have cleaner energy and we have more coal, this cap and trade system]... creates a stage for wealth transfer from the Midwest to the coasts - and we don't like that. We are going to pay more and they are going to get a windfall. What's the point of that? It's a big issue for Midwest legislators."

I don't blame Dorgan and Pomeroy for being sceptical of the "postage stamp" strategy. Their state will face major costs, and the strategy puts supporters at risk in the 2010 or 2012 elections. The Senate could still choose al alternative strategy. They could set aside Waxman and Pelosi's vision of realpolitik (that had almost everyone holding their noses by the end of House debate) and take Dorgan's critique seriously. An alternative strategy would be to level with the American people, tell them that costs might be high, but auction revenues will provide them with a dividend to help cover the costs. Perhaps Van Hollen's Cap and Dividend bill could be modified to limit the tradability of the auctioned permits, and then return the revenues to the people, bypassing the lobbyists and financial speculators.

Such a proposal would have to tread a narrow path past these entrenched players:
- K Street lobbyists (and utilities) that want free allowances (now in the name of "consumer protection"),
- Big government liberals who want to spend the revenues on programs,
- Pro-market traders who want little government oversight on trading and unlimited offsets,
- And the unusual bedfellows of the U.S. Chamber of Commerce and those environmental justice groups that distrust carbon pricing (The Chamber would rather climate action remained "voluntary" and the EJ groups would prefer command and control regulation over market mechanisms).

If Cap and Dividend would help get a few more votes for a climate bill, then now is the time for Dorgan and other midwestern legislators to let the Senate leadership and the White House know that there is a way to get them to say "yes."