The carbon tax and 100 percent dividend

Professor James Hansen, a leading scientist who appeared in Al Gore's landmark climate film An Inconvenient Truth, has made a personal appeal to U.S. President-Elect Barack Obama urging to recognise that current approaches to climate change -- notably the "cap and trade" system for curbing greenouse emissions -- are ineffectual and must be replaced by stronger measures.

One of the most important keys to truly reducing carbon emissions must be carbon taxes, he argues. This is sensible. The innovative part of his proposal to deal with it recognises the politics of the problem, notably that it is politically very difficult for any politician, especially in the United States which is deeply penetrated by powerful anti-tax lobbies and anti-tax ideologies, to impose or increase carbon taxes. As well as the pure tax element, some people oppose carbon taxes because they believe them to be regressive in nature - that is, they hit the poorer sections of society hardest.

He proposes the "carbon tax and 100 percent dividend" solution, which involves levying a tax on carbon - then redistributing the entire proceeds of the tax to the affected population, on an equal basis. (New Scientist magazine recently wrote about it, here.)

This proposal does two things, from a political (and economic) point of view. First, it is possible to sell this as a measure that does not raise taxes, since all the taxes that would be raised would be redistributed. Second, it would quite likely be -- and this depends on how the redistribution is structured -- a tax-progressive measure -- poorer people who tend to use less fuel than the average use would receive a net dividend from this, paid for by the gas-guzzlers. This would create powerful incentives for reductions in carbon emissions -- and it would also, if implemented credibly as a long-term proposal, would provide incentives for investments in alternative low-carbon fuel technologies, as it could effectively provide them with a guarantee that the price of carbon-based fuels against which they compete would not sink below a certain level and put them out of business.

Another way of creating powerful incentives would be to use the income from carbon taxation to improve our energy efficiency radically - improved insulation, transport structure, etc.

This notion of directly distributing carbon-related revenue is not new: a similar (but somewhat different) idea has also been proposed for oil-producing nations - instead of oil revenues being paid directly to governments, they could be paid directly, and equally, to all a nation's citizens. Alaska already does it in a limited way. This proposal could, in theory, be combined with a pledge to curb domestic fuel subsidies in oil-rich countries (where fuel subsidies are common) - and this would make it rather more like the carbon tax proposal that Hansen outlines above. See here for a short letter in Foreign Affairs magazine summarising this issue, or here for a longer paper.

This is not a core TJN issue - many other capable people are active in this area and we tend to seek to work in areas where others aren't working -- but it is certainly of interest to us.