Wed, May 22, 2019 - Page 9 News List

Carbon dividend as an alternative to a carbon tax

By Mark Paul and Anthony Underwood

Climate change is the world’s most urgent problem and in the US, the left, at least, is taking it seriously. Earlier this year, US Representative Alexandria Ocasio-Cortez and US Senator Edward Markey, both Democrats, introduced the Green New Deal (GND) resolution, which offers a blueprint for decarbonizing the US economy.

However, while a growing number of Democratic presidential contenders have endorsed their proposal, centrist Democrats and Republicans continue to cling to a different climate policy approach.

The key centrist proposal, in keeping with the prevailing neoliberal dispensation, is a carbon tax.

The idea is simple: If you tax fossil fuels where they enter the economy — be it at a wellhead, mine or port — you can fully capture the social cost of pollution.

In economic parlance, this is known as a Pigovian tax, because it is meant to correct an undesirable outcome in the market, or what British economist Arthur Pigou defined as a negative externality — in this case, the greenhouse gas emissions that are responsible for global warming.

As a response to climate change, a carbon tax is immensely popular among economists from across the political spectrum and it does have an important role to play.

However, it is far from sufficient. Rapidly decarbonizing the economy in a way that is economically equitable and politically feasible would require a comprehensive package on the order of the GND.

That means combining some market-based policies with large-scale private and public-sector investments, and carefully crafted environmental regulations.

Even in this case, including a standard carbon tax involves certain risks. Just ask French President Emmanuel Macron, whose country has been roiled by months of demonstrations that were initially launched in response to a new tax on diesel fuel.

The lesson from the weekly “yellow vests” protests is clear: Unless environmental policies account for today’s high levels of inequality, voters would reject them.

Nonetheless, as progressives push for more green investment, they would look to the carbon tax as a source of revenue. After all, depending on the size, it could raise almost US$1 trillion per year.

However, rather than a straightforward levy, they should consider implementing a carbon dividend, whereby carbon would be taxed, but the proceeds would be returned to the people in equal shares. Yes, this would preclude one option for funding the GND, but it would ensure that the transition to a carbon-free economy remains on track, by protecting the incomes of low and middle-class households.

A common objection to a carbon dividend is that it would defeat the original purpose of a carbon price, which is to encourage people to reduce emissions.

However, this is not true. To see why, suppose you are a low-income American, spending US$75 per month on gasoline. Assuming that your driving behavior does not change, a carbon tax of US$230 per ton (0.9 metric tonnes) — the level needed just to put us on a path toward limiting global warming to 2.5°C above pre-industrial levels — would raise your monthly fuel expenditure by US$59, to US$134, or 79 percent. In this case, you unquestionably would feel poorer. This is what economists call an “income effect.”

Now imagine that a carbon dividend is in place: You would receive a monthly payment of US$187, more than offsetting the price increase and leaving you feeling richer.

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