California can use carbon revenues to build durable public support for its pioneering effort to wean the state's economy from fossil fuels. Based on a memorandum written for the Economics and Allocation Advisory Committee (EAAC) of the California Air Resources Board and California Environmental Protection Agency.

The return of carbon permit auction revenues as equal per capita dividends to the public is sometimes termed ‘cap-and-dividend’. This policy option was singled out in Governor Schwarzenegger's 22 May 2009 letter to the EAAC:

There are three fundamental rationales for cap-and-dividend.

The principle of common ownership of nature's wealth: A consequence of any policy to limit use of a resource–to manage scarcity–is the creation of property rights. Cap-and-dividend starts from the premise that rights to the property created by the introduction of carbon permits belong in common and equal measure to all. Cap-and-dividend is a ‘feebate’ arrangement in which individuals pay fees based on their use of a scarce resource that they own in common, and the fees are then rebated in equal measure to all co-owners. In this case, the scarce resource is the California's share of the carbon storage capacity of the atmosphere; the fee is set by the carbon footprint of each household; and the co-owners are the people of the state.

Protection of household real incomes: A second rationale is to protect the real incomes of households from the impact of higher fossil fuel prices resulting from the cap. If the amount paid by households in higher prices is returned as dividends, the household sector as a whole is made whole by the policy. The net impact on any individual household varies depending on its carbon footprint. Those with larger-than-average carbon footprints pay more than they receive in dividends; those with smaller-than-average carbon footprints receive more than they pay. Since carbon footprints are correlated with income, lower-income and middle-income families generally receive greater net benefits from the policy than upper-income households.