The Carbon Tax That Keeps on Giving

The gravity of the climate crisis is finally sinking in. And according to more than 3,500 economists, including 27 Nobel Laureates, the most cost-effective way to reduce fossil fuel emissions sharply enough to forestall that crisis is through carbon pricing.

Some say we should back-burner the idea, in light of the “Yellow Vest” riots against rising gas prices in France. But before so readily dismissing carbon pricing, let’s consider something. The gas tax policy in France was missing the one ingredient that might have turned the public’s scorn into an embrace: revenue neutrality through distributing the pot of money back to citizens.

While taxes are admittedly unpopular, economists point to their efficiency in reducing unwanted behaviors. If you want less of something, make it more expensive, as we did for cigarettes. In the case of carbon taxes, that “something” is greenhouse gas emissions. The idea is, if fossil fuels get expensive, utilities and manufacturers will turn to cheaper, low-carbon alternatives for power. Thus, the carbon footprint of the entire economy will go down, and our reliance on fossil fuel, along with the corresponding carbon tax revenues, will fade. But until then, the pot of cash assessed from energy companies could be enormous. What to do with all that money?

One option is to add it to the federal coffers, but that’s anathema to the political right. Alternatively, the money can be distributed back to the citizens in the form of lump-sum rebates, or dividends. In the French plan, however, there was no dividend. And the dividend changes everything.

There is something very powerful about getting a cash rebate. Witness the tenacity of the 37-year old Alaskan dividend, which is paid to residents from the state’s oil production revenues. Mess with that, as their last governor did, and you don’t get re-elected.

In Canada, four provinces will soon begin implementing “carbon fee and dividend” plans, as part of the nationwide carbon pricing plan mandated by Prime Minister Justin Trudeau. Leo Varadkar, the Irish Prime Minister, is advocating for a similar approach to help Ireland meet its greenhouse gas emissions targets.

In effect, a carbon dividend is like a stimulus check that’s good for the environment to boot. A study funded by the Citizens’ Climate Lobby suggests that by putting more money into people’s pockets, carbon dividends in the U.S. would boost the health care, retail, and service industries and produce more than 2 million jobs within 10 years.

Where’s the incentive to use less carbon, if dividends are padding household budgets? The answer lies in the power of the “price signal.” With a carbon tax, only carbon-intensive products are hit with a cost increase. Consumers then instinctively choose the cheaper, lower-footprint options. All things being equal, everyone loves a good deal. And since the stuff we buy is responsible for the bulk of our carbon footprint, this price differential is crucial.

Although dividends are designed to ease the blow, some detractors feel accepting them would make us complicit in the extraction of fossil fuels. Does the cigarette tax revenue added to our federal and state government budgets make us all complicit in lung cancer? No. Can we flip a switch and go cold-turkey overnight? No. But both carbon and cigarette taxes can wean us off our self-destructive habits.

Perhaps the biggest question is whether the American public will go for it. Recent surveys by the University of Chicago, the University of Michigan, and Yale show support for rebating a carbon tax to citizens, at rates of 49 percent, 62 percent, and 58 percent, respectively. Notably, the first two surveys show even greater support for directing carbon tax revenue to renewables. But dividends and renewable investments aren’t mutually exclusive. After all, the whole point behind a fee and dividend policy is to spur alternative energies.

Also, it’s not clear that respondents grasped the potential size of the household rebate. It could peak at thousands of dollars a year for the average family — depending on the steepness of the tax — before both emissions and dividends wane. Because survey questions leave little room for nuance, that detail was understandably omitted from the wording of the questions. Still, it’s hard to accurately gauge potential support for a plan when the public doesn’t yet understand how that plan would work.

Assuming the public does get behind the idea, the next question is: Who should get the rebate, and how much should they get? Some feel that adding special interest tax deductions, as British Columbia is doing, weakens a plan. Perhaps we should heed the cautionary tale of Australia, where the plethora of recipient categories opened a Pandora’s box and may have contributed to the demise of their carbon tax after just two years.

In the U.S., where lawmakers find it difficult to agree on anything, deciding “who gets what” could delay a climate bill, if not derail it entirely. For now, the simplest and most politically viable solution may be to give every household an equal amount.

Indeed, the idea is gaining some traction on both the right and the left. While calling for a tax can be political suicide for Republicans, giving all the money back through equal dividends makes the strategy revenue-neutral. Thus, the “no-tax” pledgers can get behind it, says the conservative Climate Leadership Council, which is accruing a wide range of supporters for its carbon dividends plan.

Meanwhile, the progressive nature of the plan can appeal to the left. According to a 2017 U.S. Treasury report, and a recent Economists’ Statement, the majority of households, “including the most vulnerable, will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices.” It may be counter-intuitive that equal dividends allow lower income quintiles to come out ahead. That’s because the smaller your budget, the less you tend to buy, and thus, the smaller your carbon footprint. By design, the rebate isn’t enough to cover the lifestyles of the wealthiest quintiles. Those households can afford to take measures to shrink their footprints, which is exactly what is needed.

Given the urgency of the climate crisis, it is crucial that legislators craft a climate bill that can pass Congress and endure changes in administrations. Importantly, and unbeknownst to many, there is a fee and dividend bill currently in the U.S. Congress: H.R. 763, the Energy Innovation and Carbon Dividend Act, the first bipartisan climate bill in nearly 10 years. It attempts to do one thing only: reduce emissions from the combustion of fossil fuels in a way that protects the majority of citizens from higher prices. Aware that the bill is just one tool in the toolbox, its sponsors carefully worded it to allow complementary regulations to tackle our myriad of other environmental issues.

Of course, any policy that drives up consumer prices will be a tough sell. But with the promise of hefty, regular dividends, at least people have a tangible answer to the crucial question, “What’s in it for me?” And that might make all the difference.

Barbara Lucas is a freelance radio producer with a master’s degree in environmental policy from the University of Michigan.