Yves here. Carbon dividends are a way to create support for setting a price for carbon. None other than those starry-eyed granola heads at Financial Times called for setting a price for carbon in 2007.
Pigovian taxes (ones meant to discourage activity, like transactions taxes) should typically not be seen as revenue generators, since you want the thing they tax to go away or at least diminish a ton. But advanced economies are so hooked on fossil fuels that these disincentives will take time to change behavior in a fundamental way.
By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Every day it becomes clearer that we have to break our addiction to extracting dirty stuff from the ground to burn for energy. But how to pull it off without triggering political and economic chaos? Economist James K. Boyce, a senior fellow at the Political Economy Research Institute of the University of Massachusetts Amherst, is the author of a new book exploring that question, The Case for Carbon Dividends. In a conversation with the Institute for New Economic Thinking, he outlines a plan that could not only reduce carbon emissions, but help bridge the gap between the rich and the rest. And it might even survive the political system.
Lynn Parramore: You take it as a given that the key to reducing fossil fuel use is to put a price on carbon emissions. But some say that it won’t really impact climate change or that it will hurt the economy in various ways. How do you respond?
James K. Boyce: A price on carbon emissions is one key piece of the solution. But it can’t be just any price: it has to be anchored to an emissions-reduction trajectory that is consistent with climate objectives, such as the Paris target of limiting the increase in average global temperatures to 1.5-2 °C.
There are a several options for doing that. One is putting a cap on the total amount of fossil fuels allowed to enter the economy, a cap that would get lower over time. Then, we could auction allowances (also called permits) up to the limit set by the cap. Another option is a tax that is indexed to emission targets, so that the rate adjusts automatically as needed, sort of like an adjustable-rate mortgage. Or we could have a combination of the two, in which the tax is the floor price for permit auctions.
Arbitrarily setting a price and hoping it will do the job is a recipe for uncertainty at best and failure at worst. It’s true that most carbon prices across the world today are too low to have had a substantial impact on emissions. But that’s an argument for a more robust price, not for a price of zero. Just because you’ve tasted weak coffee doesn’t mean you should never drink coffee again.
Would a carbon price that is robust enough to do the job “hurt the economy”? Quite the contrary. What will really hurt the economy is failure to stabilize the Earth’s climate. A carbon price firmly anchored to emissions-reduction goals will reorient the economy towards greater energy efficiency and cleaner energy. The resulting innovation and investment will grow the economy, but grow it in a new direction, leaving behind the fossil-fueled era.
LP: What exactly are carbon dividends?
JB: Carbon dividends are equal payments to every resident funded with the revenue from putting a price on carbon.
LP: So that means once these revenues start rolling in, everybody gets checks in the mail?
JB: That’s the idea. Dividends can be disbursed monthly, quarterly, or annually. It’s not rocket science to do this. Alaska already pays dividends to all state residents with revenue from oil extraction. One could even front-load the payments, so that the first dividend arrives as soon as fuel prices go up.
The economic principle behind carbon dividends is called a “feebate”: individuals pay fees according to their use of a shared resource, and receive rebates by virtue of their common ownership of the resource. The idea can be illustrated by an analogy.
Suppose that 1,000 people work in an office building whose parking lot has only a few hundred spaces. If everyone could park free of charge, there would be chronic excess demand. To avert the resulting congestion, a fee is charged to limit demand for parking spaces to the lot’s capacity. Every month the money that is collected in parking fees is paid out as equal rebates to everyone who works in the building. Those who bicycle to work or take public transport come out ahead: they pay nothing to park and still get their share of the revenue. Those who carpool more or less break even. Those who commute every day in a single-occupancy vehicle pay more in fees than they get back.
Carbon dividends apply this idea to parking emissions in the atmosphere.
LP: How does your proposal fit into the idea of a Green New Deal?
JB: The centerpiece of the Green New Deal is investment and innovation in a clean energy economy that works for everyone, not just for the richest one percent. Carbon dividends fit perfectly with this idea.
Placing a strict limit on how much fossil fuel we burn – which increases their price – strengthens the incentives for individuals, firms, and governments to invest in the clean energy economy of the future. And dividends are paid to everyone, so the revenue from higher fuel prices, the carbon price, is not pocketed by the wealthy and powerful few. Carbon dividends are based on the principle that we all own the atmospheric parking lot in common and equal measure.
The net impact of the price-and-dividend policy on any household’s income depends on the size of its carbon footprint. Most low-income households come out ahead, since they consume less-than-average amounts of just about everything, including fossil fuels. Most middle-class households break even or come out a bit ahead. Upper-income households generally pay more in higher fuel prices than they get back in dividends, because of their higher consumption of just about everything, including fossil fuels.
LP: So that keeps carbon taxes or prices from hurting people who can least afford it, like truck drivers or ordinary commuters.
JB: Right. In industrialized countries like the U.S., fuels are more of a necessity than a luxury. As a percentage of their incomes – although not in terms of absolute dollars – the poor spend more on fossil fuel than the middle class, and the middle class spends more than the rich. In the absence of dividends, in other words, carbon prices are tantamount to a regressive tax.
One possible alternative use for carbon revenue is to fund public investment, including investments in a Green New Deal. It would be possible to use some revenue for this purpose and some for dividends. Back in 2009, for example, Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) introduced a bill that would have capped emissions, auctioned permits, returned 75% of the revenue to the people as dividends, and devoted the remaining 25% to public investment. But it would be an irony – and a serious political liability – if the Green New Deal were funded mainly by a regressive tax.
LP: How would the carbon dividends plan be implemented?
JB: It’s pretty straightforward. We know how to auction carbon permits. The northeastern states, for example, have been doing it four times a year for the past decade in the Regional Greenhouse Gas Initiative for curbing power plant emissions. We know how to pay dividends. The Alaska Permanent Fund has been doing it for more than 30 years.
The easiest way to disburse dividends is via electronic payments. Just like Social Security and veterans’ benefits. Those who prefer them can get checks in the mail. A compelling advantage of disbursing dividends as stand-alone payments, rather than in the form of income tax credits or by some other indirect route, is to ensure that they are completely visible to the public. This visibility is crucial for the political durability of carbon pricing. People will see fuel prices rising at the pump. At the same time, they need to see the revenue coming back to them in a fair and transparent manner.
To protect energy-intensive, trade-exposed industries, most carbon pricing proposals include border adjustments like carbon tariffs on imports and rebates to exporters. That way, companies can maintain their competitiveness vis-à-vis producers in locations without a comparable carbon price.
The price-and-dividend plan could be implemented by individual states, too. One way to tackle the competitiveness issue at the state level is to set aside a share of the total carbon revenue equal to what is paid by businesses, and to rebate this to firms in equal amounts per employee. A side-benefit of this would be to strengthen incentives for job creation. The same can be done for local governments. This has been proposed in Massachusetts.
LP: How does this idea win support across the political spectrum?
JB: I use the term “libertarian socialism” to describe the underlying philosophy behind carbon dividends. The concept is libertarian in its respect for the individual, and socialist in its commitment to equality. Today the labels “libertarian” and “socialist” are usually affixed to opposite ends of the political spectrum. But there is a strong connection between the egalitarian distribution of power and the egalitarian distribution of wealth, central tenets of liberty and socialism, respectively. Carbon dividends are consistent with both.
In the U.S., carbon dividends have gained support on both sides of the political aisle. The Cantwell-Collins bill was the last bipartisan climate legislation proposed in the Senate. A new House bill called the Energy Dividend and Carbon Dividend Act is co-sponsored by a Democrat and a Republican. Democratic Senator Chris Van Hollen of Maryland, who championed carbon dividends as a Congressman, has proposed a new bill in the Senate. Republican elder statesmen George Shultz and James Baker are among the co-authors of “The Conservative Case for Carbon Dividends,” a proposal advanced two years ago by the Climate Leadership Council (CLC). The Citizens’ Climate Lobby, a non-partisan advocacy group, has been working to build grassroots support for carbon dividends around the country.
In my view, bipartisan support is essential if climate policy is to be politically durable. An effective climate policy cannot be a one-off victory: it must endure long enough to see the clean energy transition to its conclusion. A policy that is vulnerable to being scrapped when there is a change of power in Washington won’t cut it.
The Yellow Vest movement that broke out in France last November was sparked by the Macron government’s announcement of a fairly modest increase in fuel taxes. The reaction is a loud and clear warning of the dangers in any policy that combats climate change at the expense of working people. Political leaders and clean energy advocates around the world have taken notice. German Green Party co-leader Annalena Baerbock recently said, “the lesson from France is that we cannot save the climate at the expense of social justice.” I think that is absolutely right. Carbon dividends are a way to combine the two.
LP: How do we overcome the big-money influence of those invested in the fossil-fuel economy? Who is currently supporting carbon dividends and who is opposed?
JB: Good question. For starters, it’s important to distinguish between capital and labor. Fossil capital faces losses in the form of stranded assets: plant and equipment, and reserves in the ground, whose market value will fall in some cases to zero in the clean energy transition. I don’t feel overly sorry about this. It’s what happens to firms in a market economy when they make bad investment decisions. I hope that betting on continued use of dirty energy will turn out to be a really, really bad decision.
In the meantime, these firms had a pretty good run for their money.
Labor – and here I mean not only workers in the fossil-fuel sector but also communities that depend on them – is a different matter. The workers and communities that provided our energy in the past performed a great service. They need and deserve assistance as we shift to the clean energy economy. A just transition is a key component of the Green New Deal.
Fossil capital is likely to oppose any policies that would sweep its assets into the dustbin of history. The only way to overcome this opposition is to build a broad and deep alliance among everyone who puts the long-term well-being of our children, our grandchildren, and humankind ahead of the short-term greed of those who profit in the fossil-fuel status quo.
But it’s been interesting to see that some energy firms, including ExxonMobil, Shell, and BP, came out in support of the Climate Leadership Council’s (CLC) “conservative case” for carbon dividends.
LP: Is that kind of support a sign that there’s something wrong with the idea of carbon dividends?
JB: It’s important to distinguish the baby from the bathwater. I think there are two specific features of the CLC plan that made it palatable to some oil-and-gas firms. The first is the initial carbon price: $40 per ton of carbon dioxide. This would be enough to spur the shutdown of coal-burning power plants in favor of natural gas-fired plants, expanding the market for gas producers, while not being high enough to make a serious dent in demand for transportation fuels. The plan was vague on how the price would increase over time, but for Big Oil $40 may be just about the sweet spot.
The second inducement was a curious line of legalese inserted in the CLC plan saying that carbon taxes “would make possible an end to federal and state tort liability for emitters.” There is no intrinsic connection whatsoever between a liability waiver and carbon dividends. I can only surmise that this was put in as a carrot for the corporations. If so, and if this was enough to get them to sign on, it reveals just how deep the anxiety runs in boardrooms about the prospect of being held to account for the colossal harm that fossil fuel corporations have inflicted on people and the planet. The precedents of Big Tobacco, the demise of Union Carbide after the Bhopal chemical disaster, and the bankruptcy of Johns-Manville Corporation due to asbestos liability are instructive here. I regard corporate liability as a valuable bargaining tool that should not be relinquished lightly.
In speaking to diverse audiences about carbon dividends, I’ve often been asked, “This seems like a great idea – why haven’t I heard of it before?” I explain that it’s because no one stands to get rich from carbon dividends. No big-money interests are paying anyone to publicize the idea. The only way we will get carbon dividends – and the only way we will see effective solutions to the climate crisis – is for the people to join together and demand them. That is the bottom-line message of the book.
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“Most low-income households come out ahead, since they consume less-than-average amounts of just about everything, including fossil fuels.”
I really have a hard time supporting any climate plan that makes anyone living in poverty worse off than they already are. It would be so much better to just give away efficient heating/cooling systems and insulation retrofits than all this market-based [family blog].
Is it so much better? I mean maybe do that too, but giving away efficient systems doesn’t set any absolute limits on carbon (Jevon’s paradox possible), in theory this does. Efficiency versus absolute limits when efficiency doesn’t necessarily lead to absolute limits and absolute limits is what we actually need (maybe of zero right about now). Because currently we make efficiency improvements and still carbon use goes up every year, I guess in theory there could be a point where it doesn’t but who knows.
“In theory” is doing a lot of work there, yea shrug, I don’t know, what do we have in terms of working models? Also getting it done politically, I knew sincere people in citizens climate lobby, who were convinced that when climate change started really hitting everyone would jump on board with their plan, be clamoring for it, well it’s hitting really fricken hard now, and uh …
But yea overall the poor should be more than compensated for any green policy, entirely agreed on that.
While I totally endorse the use of a revenue neutral carbon tax to reduce carbon pollution, efforts to give it teeth go much deeper. As pointed out in the article, a revenue neutral tax is one in which no one group can use to get rich.
One of the underlying impediments is the use of the petro/dollar by the United States. The use of this mechanism ties our balance of payments with controlling the source and trade of oil. A diminishing use of oil on the planet will reduce the centrality of our economic power. As Michael Hudson pointed out in his article published on this site on July 21, 2019:
“Global warming is the second major existentialist threat. Blocking attempts to reverse it is a bedrock of American foreign policy, because it is based on control of oil. So the military, refugee and global warming threats are interconnected.”
Since President Nixon made the petro/dollar a central feature the US economic system, the use of oil has sky rocketed around the planet. To get control of this problem another mechanism for global trading must be found.
The Chinese appear to desire to replace the dollar with the yuan, but even this has problems, as their economy is currently largely supported by the use of coal. A trading currency based upon a basket of currencies would be much more appropriate.
https://www.nakedcapitalism.com/2019/07/michael-hudson-u-s-economic-warfare-and-likely-foreign-defenses.html
On this topic, I would recommend reading the last post on https://humanitatis.home.blog
Every proposal CCL comes up with has a horrible, corporate friendly nuance. The liability exemption is noted above; their first bill in MA amounted to a transfer of wealth from households to corporations. If they want me on board, first get the impoverished their due, then maybe I’ll consider a carbon tax. Very sincere people can have no clue how badly they are being used by TPTB. And now I’m sad to see PERI jump on board.
Carbon dividends are a good idea but I’m still worried about the yellow-vest reaction. Those guys were screwed by the French government being too stupid to realize they couldn’t externalize the cost of carbon onto those who were dependent on its use. Commuters, truck drivers, etc. Independent contractors who have to do a lot of driving. If the people who are most vulnerable get a break, this will work. I have learned that you don’t have to go running around doing errands more than twice a month. Now that I’m retired. A mother with kids is a different story all together. First things first: provide a viable alternative transportation, then do carbon dividends.
Providing a viable alternative transportation seems to be a very difficult problem in an area (US car country, for example) where almost everything has been built around private cars and the like. I do know a lot of people who manage to live without a car, but in the outlands it’s a significant feat and transition away from the use of a lot of energy to move around will be viewed as hard punishment. The shorter version is: the American Way of Life is not viable.
There are ways around. One alternative to running endless errands in your car is having corner stores. Walkable. The word “stores” speaks for itself. In the 1700s there were stores. Small buildings full of local surpluses available for exchange. And walkable, or horse able. We need walkability. Just for starters.
True, the solution to Carbon use appears to include a return to “local.”
In other the words the “demolition of largeness”, in enterprises and probably government.
Which then tilts at large urban areas and their concentration of people, large farms, and large landownership, and indicates than the concept of property rights also reverts, to “commons.”
Which is another way of saying “socialism”.
It’s expensive, in order to make it work you’d need a great frequency of buses (not that trains may not also have a place), running very regularly, going everywhere, and free or near free. But expensive shouldn’t be the obstacle? Yes, but look at who we are expecting to pay for this mostly: municipalities, they don’t have endless funds.
Susan,
The Armed militias threatening to protect Oregon Republican legislators from having to be dragged to the statehouse to meet a quorum requirement are a small equivalent of the Yellow Vests in the U.S.
https://www.thedailybeast.com/armed-militias-pledge-to-fight-for-fugitive-oregon-gop-lawmakers-at-any-cost
https://www.vox.com/2019/6/21/18700741/oregon-republican-walkout-climate-change-bill
Carbon credits, or whatever clever green washing name you hang on them, would be more acceptable if they were means tested in their applications, i.e. the rich get charged but the poor do not. (The government provides free smartphones to citizens. Every carbon credit paid has a unique number, refunded when filing taxes.)
Most importantly, there should be ZERO profit in them, zero handling fees by Wall Street and the usual parasites that would love to hang a privately administered and profit generating tax on every American.
The other problem, as I see it, is that the use of the carbon will just be transferred somewhere else, to a wealthy use who can pay for it, thus no savings in carbon emitted nor energy used.
Nice way to get the riff-raff off the roads for the Ferrari driving elite though. We already have toll lanes in the S.F. Bay Area. The wealthy zip by on the dedicated lane and the rest sit in bumper to bumper traffic.
Plant a lot of trees.
Eliminate tax deductions for children, further disincentivize childbearing.
Vehicles below the threshold gas mileage will be seized by the state and crushed into a cube right in front of you.
Modest beef tax to encourage healthier eating habits.
Air travel tax. It will be a minimum of $500 to fly anywhere.
Solar panels on every roof, decentralized power generation.
Smarter parking. Removal of one half of the asphalt facing the sky.
Golf courses should be encouraged to revert to nature, possibly by making golf illegal.
Totalitarian dictatorships are going to be flavor of the month in the US, just as long as they pinky-promise to only use that power when dealing with Bruce’s priorities.
There is no mechanism to solve this at this point, short of world conquest and genocide… So forget about it. We’re going over the edge. Plan accordingly.
Childbearing is already below replacement level in the USA. Eliminating tax deductions is very regressive as are punitive taxes on airline passengers (tax, or better, nationalize, the airlines). I can relate to banning golf, however. Make every golf course a butterfly refuge and tax lawns.
“Childbearing is already below replacement level in the USA,” until you count immigrants and their added growth. (Plus they use far more energy and emit more carbon here than back home.)
https://www.fairus.org/issue/population-environment/population-growth
So far carbon taxes have been used in some examples to finance tax breaks for the rich. That is the best way to disengage the masses in CC fighting. Fossil fuel asset owners must be applauding people like Macron with their hands and their ears.
One concern is with transborder effects. Some products have large carbon inputs but are not fossil fuels themselves. EG. steel, concrete, ceramics etc. You would have to put tariffs on them or you would simply export their production and then and then import the products for a net increase in carbon use because of shipping.And of course adding tariffs would mean that trade deals would need to be re-negotiated. Not impossible by any means, but an added complication.
Each person who doesn’t own a motor vehicle gets a substantial tax credit/refund. Each person whose livable space is under a specific square footage gets a big tax credit/refund. Each person who eat 100% plant-based food also gets tax credit/refund. Each person who commutes on a bicycle or using public transportation gets a tax credit/refund. Each person who consumes less than a specific annual personal consumption level gets another one. Let incentives do the work.
Unworkable chaos, except for making all public transportation free–as long as thugs and sleeping bums can be permanently banned.
That’s the problem with transit in most urban areas, when it finally arrives, and why people choose to drive.
We’ll believe the politicans are serious about fighting climate change when they manage to divert money to make transit efficient and free.
It would be useful to see some actual dollar amounts of consumer cost increases. The only dollar amount above that I could see was $40 dollars per ton of carbon dioxide. How much would this mean for the cost of gasoline, heating bills, air fares, etc.?
I would think a carbon tax on the wealthy would be a good start, for example fuel for private jets and private yachts over 40 feet; and heating and electricity for houses over 3,000 feet.
It seems to me the first proceeds of a carbon tax of any kind should be to fund carbon sequestration research, and then carbon sequestration itself.
Mother nature will solve the Carbon problem, aka Humans.
Humans may not, because they are Greedy.
Physician, heal thyself was always satirical.
Dinosaurs had small brains and lasted millions of years.
Humans have large brains and look likely not to last millions of years.
Personally I suspect intelligence as we practice it is not an evolutionary advantage, which might be why SETI has had no success.
The parameters appear clear: Intelligence as we practice it and Greed are mutually destructive.
Then the, academic for human, question becomes, can there be intelligence in the universe without greed?
Global fossil fuel subsidies were $4.7 trillion in 2015 per the IMF. When are these scheduled to go away?
Alaska has 750,000 people, the U.S. 320 million
What is the enforcement agency for a carbon tax? What are its powers? Where will it be located. How large is the staff?
Will the creation of a carbon market be allowed which would threaten a globalized economic system (with transnational production to assure corporate power dominates state power), and threaten US hegemonic protection of that system which depends on the control of oil (petrodollars)?
“dividends are paid to everyone…“
Are child support, victim restitution, jail fees, outstanding warrants, back taxes, student loan interest charges and civil judgments for say, credit cards or medical bills, subtracted from those dividends?
This scheme might be seen as an excellent means to collect from the destitute and poor.
And the BIG question; will food be exempted from being part of the collection scheme?
Ha! Regarding golf, a shake out is ongoing. Take this from a golfer. But my regular golf course is already a wildlife refuge with a magnificent bird population (except for the undocumented Canada geese, who prefer to sh*t all over the place here rather than fly back “home”). The savanna-like aspect of a golf course is also very congenial to our evolutionary history. I would be OK with eliminating golf carts, though. Cheaper, less maintenance, much less footprint, and many fewer, how should I put this…lazy, corpulent types getting in my way. Golf is meant to be played standing on your feet, not sitting on your ass. The excellent exercise while solving a 4-dimensional physical and mental puzzle is a further benefit. But obviously among the less reflective Left, YMMV. Still, there are Lefty golfers in the home of the sport, where the business of golf is much less obtrusive in a social democracy, ailing though it is.
It’s likely too late to save the planet. We have been horrible stewards of Mother Earth.
I’m currently reading: The End of Ice: by Dahr Jamail.
a few excerpts
Yes, of course the Green New Deal is much more desirable, but a carbon dividend is better than nothing. In many cases a half a loaf can end up being worse than nothing (if it takes away the chance at getting a full loaf), but when it comes to climate change and the environment, we need to take everything we can get. A carbon dividend is something that would garner support from both sides of the aisle. It’s very rare to be able to say that about any piece of legislation related to the environment. Of course we should push for a Green New Deal, but I doubt it will ever get enough support from the establishment to get through Congress.
The economic principle behind carbon dividends is called a “feebate”: individuals pay fees according to their use of a shared resource, and receive rebates by virtue of their common ownership of the resource. Lynn Parramore
Please note how this principle supports a Citizen’s Dividend financed in part* with negative interest on large** account balances at the Central Bank – since fiat is the common property of all citizens.
*Since all fiat creation beyond that created by deficit spending for the general welfare should, arguably so, be in the form of a Citizen’s Dividend too.
**But with an individual citizen exemption up to a reasonable limit on account size since all citizens have an inherent right to use fiat in as convenient and safe a form as allowable.
“The economic principle behind carbon dividends is called a ‘feebate’:”
Should this be spelled ‘feebait’?
Instead doing the hard work of weening us off consumerism, which is now used as an engine for growth, this seems to be another way to avoid the problem of expanding production for unbounded desires. It is not just CO2 that stresses our ecosystem. Just weening ourselves from fossil fuel energy production will not stop the destruction of the rain forests, or the over-fishing of the oceans, or the monocrop collapse, or the plastic pollution of the oceans, or the transfer of wealth and power to an ever shrinking elite. This seems like one more attempt to manipulate us with a promise of something for nothing, leaving the economic system in place that is taking us to the brink of extinction – a system of markets that discount the future, externalize the costs, and concentrate wealth and power. This attempt to reign in one external cost, leaves the creative destruction machine in place rather than proposing a change in the system to minimalist production that meets our needs (rather than our desires) – to a sustainable system that doesn’t require endless growth.
that meets our needs (rather than our desires) James McFadden
The general population has been cheated out of their birthright* and reduced to wage and debt slavery by what is, in essence, a government privileged usury cartel. In exchange, they are offered a “mess of pottage” – inexpensive mass-produced consumer goods as compensation.
The proper way then to reduce over-consumption is:
1) Eliminate privileges for private credit creation, a major cause of over-consumption. I think you would agree with this.
2) Restore the stolen birthrights in as just a manner as possible. Otherwise, you are punishing the victims by removing what little solace they have from having been cheated of a more satisfactory living.
Excellent comment otherwise, though.
*Family owned farms and businesses and the commons.