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In previous posts I've explained how the U.S. can reduce carbon emissions effectively and fairly. But in the real world, the best policies don't always get adopted. That's because government policies don't arise in a void. They emerge from a political process that's driven by players.

As in any competition, it helps to know who the players are. In climate policy, there are four key contenders:

• Legacy industries
• Sunrise industries
• Environmental groups
• Everybody else.

The legacy industries are the oil, coal, gas, auto, and electric industries. Their interests aren't identical, but in general, they want to reap maximum return from their past investments and the resources they control. They're happy with the status quo and favor the least demanding changes. Because they've been around a long time — and have lots of money — they enjoy enormous political clout.

The sunrise industries include wind, solar, and some hi-tech companies, plus venture capitalists, investment bankers and carbon traders. They're comfortable with change and hope to profit from it. In general, they favor subsidies for energy alternatives and lots of carbon trading. But they have less political clout than the legacy industries.

Environmental groups represent, in theory, the planet as a whole. In reality, they differ substantially in their tactics and alliances. Some prefer market-based policies, others favor government regulation and spending. Some will make deals with polluters, others won't.

The "everybody else" category is where most of us fit in. We drive cars, pay energy bills, and vote. We want climate solutions that are fair and effective and don't empty our bank accounts. To get that outcome, however, we must make our voices heard. The bottom line in climate policy — as elsewhere — is that unless the public puts pressure on politicians, special interests will rule.

Thus far I've argued that, in order to solve the climate crisis, we need to limit and charge for carbon dumping, and shift government subsidies from fossil fuels to clean alternatives. I've also noted that, in order to offset the regressive impact of higher carbon prices, we need to return carbon revenue to households.

In this post I want to apply these principles to the details of carbon capping.

For better or worse, carbon capping is complicated. There are several ways to do it, and some are much better than others. A badly designed carbon cap can fail to achieve emission reduction goals and transfer billions of dollars to polluters' pockets. So it's important to get the details right.

One key detail is where to place the cap. Carbon doesn't trickle from just a few smokestacks, it gushes from virtually everywhere. That makes it hard to cap where it enters the atmosphere. A much easier place to cap carbon is where it enters the economy.

Think of carbon as flowing through the economy the way water flows through sprinklers. To reduce the flow of water, you wouldn't plug holes in the sprinklers; you'd turn a valve in the pipe. In like manner, to reduce the flow of carbon, we can install valves at the relatively few places where carbon enters the economy. Economists call this an upstream cap. It's actually a cap on suppliers of fossil fuels rather than a cap on emitters.

A cap on fossil fuel suppliers is far easier to administer than a cap on carbon emitters. For one thing, there are only a few hundred suppliers compared to millions of emitters. During the course of a year, these suppliers — big companies like Exxon, Shell and Peabody Coal — would have to own permits equal to the carbon content of their fuels. Once a year, they'd "true up" and pay a penalty if they don't own enough permits. No smokestacks would have to be monitored.

Every public policy has winners and losers. Sometimes it's obvious who those are, but more often, it takes some digging to understand how the money flows.

The typical way special interests get money from government is through subsidies and tax breaks. In those cases, all taxpayers pay, and favored companies gain.

Subsidies and tax breaks are very much on the table in climate policy debates. But the climate crisis presents several other ways for businesses to enrich themselves at public expense, and citizens must watch carefully.

For example, one proposal to cap carbon emissions would give polluting companies free emission permits worth billions of dollars. Other proposals would create a loosely regulated system of carbon offsets that would help traders profit, but add little public benefit.

The big economic question in climate policy is whether polluters should pay or be paid. If carbon permits are given free to historical polluters, energy prices will rise and we'll all pay more to whoever gets the permits. That wealth transfer — which over time could exceed a trillion dollars — will flow straight from our pockets to the shareholders of polluting companies.

If rewarding polluters is the wrong way to go, the right way is to make them pay. That requires a well-designed system.

Taxes vs. caps

Economists agree that, one way or another, we must raise the price of dumping carbon into the atmosphere. The debate is about how to do that.

A carbon tax is one way. Initially, fuel companies would pay the tax and government would get the revenue. But fuel companies would pass the tax on to consumers, so in the end, a carbon tax is like a sales tax on necessities. As such, it's a regressive tax — that is, the lower your income, the bigger the bite a carbon tax takes.

A carbon cap is an indirect way to charge for dumping carbon dioxide into the atmosphere. It puts a physical limit — a cap — on the supply of fossil fuels or the quantity of carbon dioxide emissions. To implement the cap, the government issues a gradually declining number of permits. As the supply of permits declines, the price of carbon rises. Since this price is ultimately paid by consumers, a carbon cap is as regressive as a carbon tax.

If we don't understand a problem, it's unlikely we'll be able to fix it. So let's begin by asking, with regard to the climate crisis, what is the problem we need to fix?

Often in public policy, the problem we need to fix isn't immediately obvious. Sometimes we see symptoms without seeing the underlying problem. Other times we see part of the problem but not the whole.

On the surface, climate change appears to be an environmental problem, or perhaps a technological one. But deeper down, it's a result of two economic and political failures.

The first of these is a market failure. Humans are dumping ever-rising quantities of greenhouse gases into the atmosphere because there are no limits or prices for doing so. There are, however, huge costs — costs that are shifted to future generations. When people don't pay the full cost of what they're doing, but instead transfer costs to others, economists call this a 'market failure.' Nicholas Stern, former chief economist at the World Bank, has said that climate change is "the biggest market failure the world has ever seen."

The second cause of global warming is misplaced government priorities. Because polluting corporations are powerful and future generations don't vote, our government not only allows carbon emissions to grow, but subsidizes them in numerous ways. Thus, despite all we know today about climate change, about two-thirds of federal energy subsidies currently go to fossil fuels. (This doesn't include the billions we spend to defend overseas oil supplies.)

It's important to recognize that these twin failures permeate our entire economy. They're not problems of the electricity sector, the automobile sector or the building sector; they're problems of all sectors and must be treated at that level. They distort the behavior of all individuals and businesses. No matter how 'responsible' any of us may be, our separate actions can't overcome what these twin failures make most of us do most of the time.

What's required are fixes for both system failures. We need to limit and pay for atmospheric pollution , and we need to shift government's attention from dirty fuels to clean alternatives. If we don't do both of those things, we won't stop climate change.

In 2006, NASA's top climate scientist warned that we have at most a decade to turn the tide on global warming. After that, James Hansen said, all bets are off. Temperature rises of 3 to 7 degrees Farenheit will "produce a different planet."

More recently, Hansen's tone has become even more urgent. The melting of arctic ice is advancing faster than anyone predicted, indicating that we literally have no time to lose. The feedbacks triggered by even modest warming — for example, as polar ice melts, the darker waters absorb more heat — are pushing us toward a tipping point beyond which massive extinctions will become unstoppable.

If Hansen is right — and most scientists think he is — then every year lost is a year closer to catastrophe. In more positive terms, we have one last chance — but no more than one chance — to save the planet. If we don't do what needs to be done — do it now and do it right — we'll be powerless to avert disaster.

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