The Clean Energy Dividend

We need climate policy above and beyond individual action; that much seems indisputable given the scope of the challenge.  However the usual approaches are a bit wanting.  The most common two proposals to appropriately account for the cost of carbon (currently treated as an externality) are Cap and Trade and Carbon Taxes. Both aim to put a price on carbon and in doing so incentivize a transition away from fossil fuels.

Neither, however, has shown much strength, either as policy or in political support. Cap and trade has been implemented in Europe with mixed results: instances of wholesale fraud but also arguments that these are fixable design flaws. Carbon taxes have been implemented in fewer places.

In my mind the key problems with these two approaches are, in the case of cap and trade, complexity, and for both together that they are not revenue neutral. The latter makes it easy to characterize such policies as expensive and bad for individuals.  The taxes collected by the government in both approaches are unlikely to be spent solely on decreasing fossil fuel use via other means (such as renewable energy investment)—it’s hard to imagine legislatures being that enlightened. In addition, cap and trade has been and is likely to be easily gameable, with industries wagering that investing 10 million lobbying dollars up front might save them from 10 billion dollars in cap and trade costs down the line; such lobbying efforts typically aim at securing higher emissions allowances or ensuring that the caps remain high.

A few years ago, James Hansen began advocating for a simple and effective alternative to these two approaches, now crisply labeled by Dan Miller as the Clean Energy Dividend. The Clean Energy Dividend works like this: at each source of carbon or each port of entry, a fee is applied per ton of carbon; 100% of the proceeds from these fees are then distributed as dividends to everyone equally (all legal residents; children receive a half share). That’s it. While the mechanism on the front end is the same as a carbon tax, this approach isn’t a tax in the conventional sense since it’s revenue neutral: 100% of the proceeds are returned to the people. A person responsible for an average amount of carbon emissions would see a net zero impact on their finances: they’d pay more for gasoline or electricity or products, but they’d receive that surcharge back as a dividend payment. However, by shifting their use towards clean energy or simply decreasing their energy use overall, individuals and families can receive more in dividend payments than they pay in surcharges.

There are a number of other benefits over and above cap and trade. As Hansen explained:

Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.

In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded.

There’s no concept of “carbon offsets” in a Clean Energy Dividend system: no polluter can reach for indulgences to cheaply avoid the fee imposed. It’s a direct, simple mechanism, and one that can be easily explained to the average voter. It’s also something that’s hard to inveigh against as a partisan scheme (though no doubt some will try): there was a mostly ignored bipartisan attempt at something similar (still a bit rough around the edges and more complex than ideal) and the approach in general would rely upon a free-market energy transition rather than a government-directed one. The latter might be a good thing in this instance.  Hansen again:

To compound matters, the Congressional carbon cap would also encourage “offsets” — alternatives to emission reductions, like planting trees on degraded land or avoiding deforestation in Brazil. Caps would be raised by the offset amount, even if such offsets are imaginary or unverifiable. Stopping deforestation in one area does not reduce demand for lumber or food-growing land, so deforestation simply moves elsewhere.

Once again, lobbyists are providing the real leadership on climate change legislation. Under the proposed law, some permits to pollute would be handed out free; and much of the money actually collected from permits would be used to pay for boondoggles like “clean coal” research. The House and Senate energy bills would only assure continued coal use, making it implausible that carbon dioxide emissions would decline sharply.

There are of course a few open questions that I haven’t seen clear answers to, though they’re not showstoppers. For example, how do we handle product imports? Clearly we wouldn’t want to ignore the embodied carbon footprint of goods purchased from overseas, as that would unfairly benefit outsourced manufacturing. In the absence of a consistent and accurate carbon accounting scheme that can be applied to overseas manufacturers (something that would be hard to oversee in the first place), it might be easiest to average the carbon fee across all products from a country by unit weight, volume, or nominal price using estimates for the country’s carbon emissions and manufacturing output.

There’s also the question of the psychology of it. Would people learn to associate Clean Energy Dividend checks from the government as refunds on surcharges they see in daily purchases, or would they treat it as a sort of tax refund check to be spent? (And would it make a difference how they view it in the first place?) It seems that more frequent dividend payments would be preferable—say, quarterly—rather than infrequent, yearly disbursements.

Finally, since it seems unlikely that for the time being such a policy will be implemented nationally, how locally could it be done? It seems that it’d be hard to do at the city or county level: drivers, for example, could drive to the next town over to fill up their tanks and circumvent the fee. So the policy might have to be implemented at the state or regional level. Unfortunately (or fortunately, depending on which policy you favor), some regions have already implemented cap and trade; it might be difficult to get them to switch to a new approach.

I’m planning on writing a simple calculator that will make it easy to compute the impact of a Clean Energy Dividend both from the perspective of an individual or family and from a larger national perspective.  More on that once it’s ready.

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