Carbon dividends are a positive, viable solution to climate change

Henrik Tiemroth

August 7, 2019

In April, activists from the Extinction Rebellion movement blockaded London’s Waterloo Bridge, kicking off a week of civil disobedience in which members glued themselves to buildings, occupied landmarks, and disrupted the lives of an estimated 500,000 people. 

They are not alone. On both sides of the Atlantic, many on the left are increasingly intent on using the climate issue as a battering ram to open the door for a horde of longstanding policy objectives far beyond the scope of the environment.

The Green New Deal, touted by America’s socialist wunderkind Alexandria Ocasio-Cortez, is packed to the gills with policies at best tangentially related to climate change, including minimum wage provisions and guaranteed employment, which is nothing short of a total transformation of the economy. The idea has apparently caught the attention of Jeremy Corbyn, who recently met with one of the congresswoman’s advisers to discuss how to develop a British adaptation.

Those of us who believe in free enterprise cannot afford to let these be the only offers on the table. As free-market liberals, we recognise the power of the market as the most efficient and most equitable way to direct productive activity and are rightly sceptical of state efforts to do what free enterprise can do better. Yet we also realise that markets can fail when the costs of individual consumption are not reflected in market prices but rather imposed onto others. Such is the case with carbon emissions, a textbook externality. 

The solution lies in a simple carbon tax to correct this market failure, by ensuring that users of carbon intensive goods and services face prices reflecting the actual cost of their consumption.

Through the price mechanism, it incentivises the utilities sector to switch to cleaner forms of generating electricity and encourages people to use more fuel-efficient cars, use public transportation, and the like.

Based modelling of Stanford’s Energy Modeling Forum (EMF) predicts a carbon fee of just $25 per ton, rising five per cent per year, could reduce emissions by 25-50 per cent by 2040; a more ambitious price could achieve even bigger cuts. Carbon pricing is a simple, powerful solution grounded in free enterprise and sound economic principles.

But there’s one problem: carbon taxes are politically fraught, as they disproportionately impact lower earner. Of course, allowing climate change to run its course would be much, much worse for everyone, including the working class. Indeed, the EMF predicts that unmitigated climate change would slow economic growth by 0.2-0.5 per cent per year.

But short-term equity concerns cannot be discounted, because they impact political processes. One need only look at France, where a tax on fuel ignited a nationwide movement against elitism and inequality, pitting the rich against the working class, cities against the countryside, technocracy against nationalism.

The simplest way to balance the carbon tax is to directly rebate the revenues to consumers in the form of a “carbon dividend”. The dividend performs several vital functions. For one, it offsets increases in the cost of living for the majority of consumers, ensuring that the burden of the tax is placed primarily upon emitters. Consumers are rewarded for individual decisions to reduce their carbon footprint, but not punished if they cannot or prefer not to do so. 

Politically, the dividend appeals to those on the right who might otherwise oppose such measures, fearing an expansion of government power and control. With the revenues rebated, the carbon price does not expand the size of government, as it does not furnish the state with funds to pursue policy objectives. Instead, it directly captures the social cost of carbon emissions without the state as a distortionary middleman.

It is no wonder, then, why a carbon dividends plan from the Policy Exchange brings together leaders from all sides. It is endorsed by William Hague and Alistair Darling, while a similar proposal for the United States is backed by a statement of more than 3,500 leading economists – the largest ever in the field.

A revenue-neutral carbon tax has been employed before with promising results. In 2008, the government of British Columbia imposed a provincial carbon tax, gradually increasing it, with the revenues rebated in the form of direct payments or tax credits.

Since then, carbon emissions in the province have fallen significantly in comparison with the rest of Canada, without any significant impact on growth. Switzerland and Sweden have implemented similar schemes. A carbon dividend plan is even gaining ground in the United States, with growing support from both parties, and has been explicitly endorsed by three presidential candidates.

Carbon pricing is advantageous to both a regulatory and emissions trading approach, providing the certainty that businesses need in order to make long-term capital investments designed to reduce emissions. Constant regulatory changes, which often occur when political power changes hands, add an additional degree of uncertainty to investment decisions. A fee also allows for the rollback of redundant regulations, giving firms more latitude to pursue emissions reductions in a way that best fits their unique needs. 

Meanwhile, the floating carbon price under cap-and-trade arrangements, like the EU’s emissions trading scheme (ETS), to which the UK remains party at least until Brexit day, can cause permit prices to be volatile, complicating long-term emission-cutting investment decisions.

Cap-and-trade can also prove a precarious dance for regulators. Permits prices are often undermined by regulations like emissions standards that reduce the demand for – and therefore the price of – those permits. As the price of the permits falls, so too does the value to firms of cutting emissions.

As the United Kingdom leaves the European Union, it will have the opportunity to also exit the ETS and pursue its own climate policy. With far-left proposals rapidly gaining ground, a new approach is needed more than ever. A carbon price and dividend scheme is the trump card to reset the climate debate in favour of liberal market principles. Britain should seize the opportunity to build on its proud legacy of climate action and lead the way in protecting our future.


Written by Henrik Tiemroth

Henrik Tiemroth is a political commentator.


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