"Dear Mr. and Mrs. Smith. Please find attached your check for $651.76. This check covers your household’s portion of the carbon fees paid by greenhouse gas emitters in the first quarter of this year. Another check will be forthcoming in three months."
A majority of Americans believe that humans are warming the planet, but we aren’t willing to pay to fix it. Only a small minority—21%—say that they’d be willing to pay markedly higher energy prices in order to address the problem.
What if we turned the tables on that question? What if polluters paid everyone else to fix climate change? That may sound crazy, but it’s economically sound. Here’s how it would work.
One of the most agreed upon tools among economists for addressing climate change is a carbon tax. Under a carbon tax, polluters would pay a fee for every ton of carbon dioxide and other greenhouse gases emitted into the atmosphere. That fee gets passed on to consumers, raising the price of gasoline and the price of electricity generated from coal and natural gas. Few Americans are eager to see their utility bills or the price they pay at the pump rise.
But what if we returned all the money raised by such fees to every woman, man, and child in the United States, equally? This is one variation on a "revenue neutral" carbon tax, where the money raised by the tax is directly returned to tax-payers in some way.
For a family with an average income and average energy use, the dollars would exactly balance out. The check (or tax rebate) received would match the increase in fuel and energy prices. But the tax would still be a tremendously powerful force in shifting behavior. With higher gasoline prices, a more fuel efficient car makes more sense as a purchase. With higher home heating or electrical bills, upgrading to a more efficient furnace or better insulation makes more sense. Perhaps more importantly, it would have a huge impact on how energy is generated. A carbon tax would raise the price of coal, oil, and gasoline, in direct proportion to the amount of carbon they emit.
But it would leave the price of solar, wind, hydro-power, and nuclear unaffected. With fossil fuels more expensive, consumers, businesses, and utilities in many areas would find that renewable energy was now the most cost-effective option, accelerating the shift already underway. Those dollars shifted to renewables, in turn, would fund additional R&D, continuing the already steep decline in the price of solar and wind power around the country.
In short, polluters would be putting money in your pocket, which you would be more likely to spend on carbon-free sources of energy and improvements to energy efficiency. They’d be paying you, and every other American, to fix climate change.
How big would the dollar impact be? At a price of $30 per ton of CO2, an evenly distributed carbon dividend would pass on roughly $2,600 to a household of two adults and two children, or just over $650 every three months. That would be matched by a roughly 3 cent per kilowatt hour rise in average price of electricity, and a 30 cent per gallon rise in the price of gasoline. More realistically, a carbon price would start out at zero for a few years and then ramp up over a following decade to a price of around $100 per ton. That long phase in would give utilities, businesses, and consumers time to adapt by increasing efficiency and switching to lower-carbon sources of energy.
A carbon dividend—a revenue-neutral carbon tax that puts money directly into the hands of U.S. households—addresses many of the concerns that conservatives and liberals alike have voiced about levying a price on carbon.
Conservatives worry that any carbon price would be negative for the U.S. economy. But by returning the funds raised to American households, a "carbon dividend" model completely offsets that effect, having no negative impact on the economy at all.
On the other side, liberals worry that consumption taxes are regressive, by putting more of a burden on the poor. But a carbon tax that is returned evenly as dividends to every woman, man, and child in the country is actually progressive. Lower income households are responsible for fewer carbon emissions. That means the carbon dividends they receive will be larger than the increase in their energy prices. And because lower income households spend a higher fraction of what they earn, that money will go back into the economy, and may actually serve as a stimulus.
Conservatives also fear the proliferation of overly complex government regulation. Yet a carbon tax is the simplest, most market-based regulation possible, and one that’s beloved by top conservative economists, including former Federal Reserve chairman Paul Volcker; Harvard’s Greg Mankiw, who served as a senior economic advisor to Mitt Romney and as Chairman of President George Bush’s Council of Economic Advisors; and Art Laffer, one of the founding fathers of supply-side economics.
But the most important reason to advocate a carbon dividend approach is that American voters may actually support it. Americans want to do something about climate change, but they’re not willing to pay much for it. Pay them instead, and the tables will turn.
Your carbon check is in the mail.