The breakthrough climate solution

Isuru Seneviratne, October 2018

Climate change has been a divisive issue in U.S. politics for decades.  However, conservatives, progressives, students, businesses, and environmentalists are supporting a carbon dividend plan to break the deadlock.

Economists have long advocated carbon taxes as the most effective means to curb the release of fossil pollution.  A tax all carbon molecules at the point they enter the economy would trickle up to each good and service based on their carbon cost.  Coal-based power and air travel would get more expensive, while a new fridge or ride-sharing becomes more attractive.  Paper bags gain on plastic.  It internalizes the negative externality of pollution throughout the economy.  A steadily rising cost on carbon would send a strong price signal motivating consumers and businesses to make low-emission investments.

However, a carbon tax fails to overcome the barriers to climate progress:

  1. Psychological – “Why should I make sacrifices now to benefit other people in other countries 30 years in the future?”

  2. Geopolitical – “Why should we suffer higher costs when competitors like China are ‘free riding’ on our efforts?” and

  3. Partisan – Although 81% of voters want action on carbon emissions, the Obama-era Clean Power Plan is being dismantled as it did not win over Republicans.

"The revolutionary step is distributing the proceeds of emissions penalties equally to all households."

The seemingly insurmountable divide can be bridged with a carbon dividend!  The revolutionary step is distributing the proceeds of emissions penalties equally to all households.  By limiting the government’s use of proceeds, the collection becomes a fee, not a tax.  A Treasury Department analysis shows that 7 out of 10 households would receive more in dividends than their higher cost for goods and services (Exhibit 1).  The poorest decile would see net incomes increase by 8.9%.  This positive feedback loop makes the solution both popular and populist, breaking through the psychological barrier.  A successful climate dividend plan should eventually include all polluting emissions.  Such inclusion increases dividends, making it politically palatable.

 

Net Impact of Carbon Dividends on U.S. Family Incomes

Exhibit 1:  Net after-tax income impact at $49/t CO2- equivalent by income decile. Source: Office of Tax Analysis, U.S. Treasury

Exhibit 1: Net after-tax income impact at $49/t CO2- equivalent by income decile. Source: Office of Tax Analysis, U.S. Treasury

To break the geopolitical barrier, all imported goods would face a border tax adjustment at the port of entry.  For example, refrigerators made with coal-based electricity in China would suffer a penalty, making natural gas-built units in the U.S. more attractive.  Trading partners who seek better terms would implement similar systems, creating a domino effect across the world.  Support for domestic manufacturing makes carbon dividends a ‘pro-jobs’ policy.  Extra cash in the hands of lower earners get spent, stimulating the economy.

Businesses desire policy predictability to make long-term investments in plants and intellectual property.  The de/regulation yo-yo has thwarted progress in the U.S.  E.g. during the last 10 days of the Obama Administration, over 190 new regulations were placed on the oil and gas industry.  Most of these have been rescinded under Trump.  A lasting solution needs buy-in from all sides.  Carbon taxes affect decisions evenly across the economy, without the need for government to pick winners or losers.  Another key selling point to businesses and Republicans is the rollback of emissions regulations made redundant.  Currently, many climate policies are overlapping, ineffective, or regressive.  For instance, 87% of electric vehicle subsidies went to the top 57% earners.  Most policies address the symptoms of warming, not the causes. 

A carbon dividends plan is a rare opportunity where the partisan barrier can be overcome.  From its start in 2016, the Climate Solutions Caucus of the U.S. Congress has grown to 90 members, with equal representation from both parties.  The expanding group seeks to explore “options to reduce climate risk and protect the economy, security, infrastructure, agriculture, water supply and public safety.”

Impact of Carbon Fee on Fossil Fuels

Exhibit 2: Price increase at $49/t CO2 over 2017 U.S. levels. China coal for reference only.
Source: U.S. Energy Information Authority, statistica.com, Radiant Value analysis

Exhibit 2 shows how a carbon fee would accelerate the phase-out of coal-based power generation.  The impact on retail gasoline and natural gas prices will be limited at first.  This allows a gradual shift to a greener future without shocking the economy.  Natural gas, renewable power, energy storage, and all other solutions can compete on equal footing.  

The world’s temperature is ~1°C above the per-industrial average and global sea levels have already risen almost by a foot. The UN IPCC reported that we have already locked in a 1.5°C rise, and that emissions need to be halved by 2030 to stay there. Saving ourselves requires rapid, far-reaching and unprecedented changes in all aspects of society. Carbon dividends does just that, while boosting the economy. Politicians don’t create political will – they only respond to it. The Citizens’ Climate Lobby empowers all stakeholders to work towards a livable planet.