On December 15, President-elect Obama introduced his choice for energy secretary, among other members of his new administration’s environmental policy staff. Echoing his remarks from a recent meeting with Al Gore, the President-elect said that a federal commitment to a “clean energy future” could help shore up the faltering economy.

The effort to mitigate climate change is a massive long-term project, but the political climate typically favors short-term rewards. How could the transition to a less carbon-intensive economy – which would take decades – stimulate spending and hiring today?

One possible answer to this is “cap and dividend,” a variation on the cap and trade concept that President-elect Obama has already endorsed. Cap and trade programs typically charge carbon emitters for permission to release carbon into the air, and then direct those revenues towards mitigation.

As proposed by entrepreneur Peter Barnes in Congressional hearings in September, cap and dividend differs from most cap and trade plans in two crucial ways.

First, cap and dividend would sell permits to carbon producers, like coal mines and oil companies, rather than carbon emitters like power plants. Second, government would not retain revenues from the auction of these permits. Instead, the fees paid by carbon producers would be sent directly to consumers.

It is this distribution of revenues to consumers – the “dividend” – that turns a tax on carbon into an economic stimulus. As Mr. Barnes (founder of Working Assets) explained in a Reuters piece:

“The advantage of cash dividends is that they’d tangibly and frequently remind people that higher carbon prices are coming back to them — and help them pay mortgages and other bills that fall due on a monthly basis. …

“Ordinary families would get the lion’s share of the auction revenue, and get it in a way that rewards conservation. Since everyone would get the same amount back, those who use the most carbon would lose and those who use the least would gain — their dividends would exceed what they pay in higher prices.”

What are the practical implications of cap and dividend? KLD Research Analyst Benjamin Blank, who focuses on the energy sector, considers Mr. Barnes’ proposal:

“I question the assertion that cap and dividend would encourage conservation. If every household gets the same rebate, regardless of energy use, then its impact is neutral. There would be no more incentive to save energy than there is now.

“Still, cap and dividend is a promising concept. Like all cap and trade programs, it must be set up with the ‘correct’ cap. That means that the permitted level of carbon emissions, or carbon production if we tax producers, must be set low enough to induce companies to utilize alternative energy sources. If emitters and/or producers successfully lobbied to keep the cap near current levels, it would be unlikely to cause any net reduction in CO2 emissions.”

Cap and dividend’s political appeal might trump its practical limitations. The National Conference on Climate Governance has released a poll measuring voters’ opinions of possible government interventions in the energy market. Compared to direct carbon taxes or other methods, the auction of emissions credits “received greatest bipartisan support, with only 5 percent fewer supporters among Republicans compared to Democrats.”

A Consideration of Cap and Dividend, Part 2, by KLD Senior Research Analyst Andrew Brengle, will further explore both the practical and political challenges that a cap and dividend program would face.