One intriguing form of carbon pricing that is being bandied about is the ‘tax and dividend’ approach. The idea is this: everybody pays a carbon tax on fuels and emitting activities. All the money is collected in a fund and redistributed evenly back to all taxpayers. As such, anyone who buys emits more than the mean quantity of carbon becomes a net payer and everyone who emits less actually gets back more than they pay. As mean emissions fall, so does the equivalence level of emissions - the point where you get back exactly what you paid.
For example, let’s imagine a tax that starts at a relatively modest $20 per tonne of carbon dioxide equivalent (CO2e). The mean Canadian produces about 23 tonnes of carbon a year, meaning they would pay $460 in carbon tax that year. That being said, the mean Canadian would also get back $460 as a dividend. A Canadian who is really trying (not flying, not eating meat, living in an efficient home, not driving, etc) might have much more modest emissions: say, 6 tonnes a year. They would pay $120 in carbon taxes and get back $460 - a nice ‘thank you’ for living a life that does less harm to others. Of course, someone who flies trans-Atlantically several times a year might end up paying significantly more in tax than they get back as a dividend.
Now say it is ten years on. The price of carbon has risen to $50 per tonne of CO2e and mean emissions per person have fallen by 25%. The break-even point is now 17.25 tonnes of carbon. As a result, someone who has not changed their lifestyle is now paying (23 - 17.25) * $50 or $287.50 a year in carbon taxes. If the 6 tonne person also managed a 25% cut, they would be earning (17.25 - 4.5) * $50 or $637.50 more in dividends than they paid in taxes.
These numbers are purely illustrative. It is possible that the per-tonne carbon taxes could be lower, and also possible that they would need to be much higher. In whatever case, the structure of the approach should be clear.
The approach has much to recommend it. For one, it is likely to enjoy the support of those already living relatively green lifestyles. For another, it has similar incentive effects to other carbon pricing schemes. It would encourage people to minimize or forego things with a heavy carbon burden, as well as make them more willing to invest in capital and technology that will reduce their carbon footprint.
{ 16 comments… read them below or add one }
I think the problem with any tax or offsetting scheme is it sends the message that if you have the money you can buy your way out. Granted that is the general message being sent now about a lot of things (Justice and the OJ Simpson case, current EPA/EC fines that are “just a cost of doing business”. )
The problem with this scheme is that you hit the consumer directly with the tax and then you hit the corporations, who might “pay” the cost but in reality will only pass on the expense to the consumer in the form of higher prices for goods, meaning you are lowering net disposable income and raising inflation, a sure recipe for economic disaster.
I know eventually the feedback look will go full circle and the consumer will vote with his dollar and support green companies, but that does take a long time and for some things demand is relatively inelastic.
Whether you tax individuals directly or corporations, it is always the consumer who actually ends up paying. Sometimes, consumers even end up paying for permits given to companies for free.
One advantage of the system above is that it is very transparent to the consumer. They can very easily approximate what effect it will have on them and, while they might disagree with the ethical principle, they can at least see a clear ethical principle being applied.
This idea could really cut opposition to a carbon tax. Nobody could accuse the government of making a tax grab, because they could just multiply their own dividend by the number of taxpayers and see that all the money is being recycled.
As an aside, should it be all taxpayers, all residents, or all citizens who get dividends?
Liberals unsure Dion can sell carbon-tax plan
Party leader delays rollout of proposal amid concerns from some caucus members of ‘weak’ communication
JANE TABER
From Wednesday’s Globe and Mail
June 11, 2008 at 4:55 AM EDT
Just to check, this would include the full Co2 value of the production, shipping, and disposal of consumer goods?
Tristan,
The easiest way to manage it would be to tax energy sources at their point of production or entry into the country and tax process emissions at the same two places.
That way, oil produced in Alberta and refined in Ontario would get taxed for carbon content at the Alberta well-head and taxed for emissions associated with refining in Ontario. Naturally, the taxes would be passed to consumers.
It is much trickier when you are talking about plastic being imported from China, but some system could still be devised.
Starting with the emission sources that are easiest to track makes sense. Producing a globally aware system will take longer, though it would be easy to apply the wellhead tax to any fuels we are importing.
Disposal is also a somewhat separate matter. It does make sense to charge households the full cost (at least, since there are other externalities) of running landfills. If garbage is being incinerated, a carbon tax should also be applied.
As long as the mean GHG emissions per person are being calculated using the same group of emission types as the carbon tax, it seems a cap and dividend system would work in a fairly equitable way.
This would probably have the effect of being broadly redistributive, since the poor are often unable to afford cars or foreign holidays and therefore often live relatively low carbon lives. In a period where income and wealth inequalities have generally been rising, this is probably a good thing (or at least it means these measures may command the support of those who think greater income and wealth equality is a good thing).
On the other hand, it would likely be regarded as an attack on rural communities at the expense of urban dwellers insofar as rural areas often mean long car journies or lots of flights. The system would need to be designed in such a way that it wouldn’t penalise those in poor, remote communities or dissaude governments and companies from providing them with services (eg. you don’t want to dissaude people from flying needed medical specialists or patients to or from remote reserves). Unless those kind of issues were factored in from the start (perhaps by excluding any necessary government services such as policing and healthcare from the system) then there might be a great deal of opposition from various sources. Or would aboriginal people be exempt anyway (since they have a unique status re. taxation etc)?
Look at that great spider!
More awesome legs!
Cap and dividend is a simple, market-based way to reduce CO2 emissions without reducing household incomes. It caps fossil fuel supplies, makes polluters pay, and returns the revenue to everyone equally.
–
Cap and Dividend (PDF)
How to curb global warming while protecting the incomes of American families. Download PDF
Against cap-and-dividend
Peter Barnes’ carbon policy proposal would not spur the economic changes we need
I should preface by saying that I am a fan of Peter Barnes. He’s an emeritus board member of Redefining Progress. He’s a smart and thoughtful guy. But I’m not a fan of his cap and dividend idea, mostly from an economic perspective.
First, the idea that a price on carbon would be transformative, and that we should do that first and then come in with other complementary policies later, is dangerously wrong. Transportation and building heating/electricity are the two largest contributors to carbon emissions, accounting for well over half the total. The price elasticity on transportation fuels is very low, as we’ve seen. With gas prices up $2 per gallon in the last three years, we’re now finally seeing small reductions in driving, somewhere in the neighborhood of 4%. $2 per gallon of gas is roughly the equivalent of $200 per ton of carbon, a price impact that the failed Lieberman Warner bill wouldn’t have brought until beyond 2040, if then.
Tax-and-Dividend
Posted by Eric de Place
06/18/2008 10:00 AM
We’ve written a bit about cap-and-dividend: it’s a variety of cap and trade in which 100 percent of the program’s revenue is returned on a per capita basis. It has the pretty terrific effect of simultaneously limiting carbon and advancing equity. Like a climate version of the Alaska Permanent Fund Dividend, it would give people a stake in the program’s success.
Now it appears that there’s a tax-and-dividend movement gaining steam. As Andrew Revkin points out in the NY Times environment blog, conservative columnist John Tierney and ur-climate scientist James Hansen are both proposing carbon taxes with a full rebate from the proceeds. They’re in the company of researchers at the RAND corporation. In the Northwest, the conservative Washington Policy Center has made a similar proposal (a small carbon tax that would offset the state sales tax). And of course, the best example of a tax-and-dividend-esque policy is British Columbia’s new carbon tax shift.
On the other hand, it would likely be regarded as an attack on rural communities at the expense of urban dwellers insofar as rural areas often mean long car journies or lots of flights.
Again, this goes back to the entitlement issue. People do not have an unrestricted right to keep on living as they have been. If rural communities can adapt to low carbon lives, more power to them. If it is painful and expensive, that is regrettable but still necessary.
Or would aboriginal people be exempt anyway (since they have a unique status re. taxation etc)?
This is an interesting moral and legal question. I cannot think of a good answer right now.
Note: the above post would be more accurately called tax-and-dividend.
In a cap-and-dividend approach, government would choose a total level of emissions and then sell or otherwise distribute permits for that quantity. That would, in turn, cause buyers of permits (energy generators, manufacturers, etc) to raise their prices for consumers. In many ways, the effects would be similar to a tax-and-dividend approach.
“A major issue I see is that you’re basing your future non-oil infrastructure on a tax that is unpredictable and will necessarily go away.”
This is one reason for which a tax and dividend system is attractive. It doesn’t eliminate ordinary tax revenue, so it isn’t problematic that the total revenues will fall over time as per capita greenhouse gas emissions do.