Cap and trade is an approach that allows power plants (and other gas generators) which reduce emissions below a set level to sell the credit for the unused reductions to others whose emissions are beyond the set level. Thus, the theory goes, the system provides plants a monetary incentive to cut back on their pollution.
However, Hansen argues that cap and trade actually enables the pollution it is supposed to eliminate, because it is enforced through the selling and trading of these permits to pollute. If, hypothetically, every polluter’s emissions fell low enough, then the price of pollution credits would collapse and its economic incentive would vanish.
Hansen argues instead for the consideration of a fee and dividend approach. In this approach, a fee on carbon would gradually increase and would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be a certain number of dollars per ton of carbon dioxide in whichever fuel. The price of goods would rise in proportion to how much carbon-emitting fuel is used in their production, but the public would not have to pay any particular fee. All of the collected fee on carbon would then be distributed to the public. People who used their dividend wisely and chose less-polluting goods would receive more in the dividend than they pay in added costs. Thus in this system, every action to reduce emissions and to keep reducing emissions would be rewarded and prolong the approach itself.