Design and implementation of carbon cap and dividend policies

An important concept in discussions of carbon management policies is cap and dividend, where some fraction of the revenues of an auction on emission allowances is returned to citizens on an equal per capita basis. This policy tool has some important features; it emphasizes the fact that the atmosphere is a common property resource, and it is a highly transparent measure that can be effectively used to protect the income of low‐income individuals. In this paper we examine this policy in the California context, and focus on the costs and impacts of a cap and dividend scheme when applied to carbon emissions associated with electricity, natural gas and transportation services. We find that cap and dividend can effectively be used to address the economic impacts of carbon management policies, making them progressive for the lowest‐income members of society. We find that the majority of households receive positive net benefits from the policy even with the government retaining half of the auction revenue. If auction revenues are instead dedicated only to low‐income households, the majority of low‐income households can be fully compensated even with the state government retaining upwards of 90% of auction revenues for other purposes. Cap and dividend policy in CA mitigates distributional impact of cap and trade. Cap and dividend results in progressive impact on household income distribution. Majority of low‐income households can be fully compensated for fuel price increases.