Carbon Tax & 100% Dividend vs. Tax & Trade*

*‘Tax and Trade’ is pseudonymously and sometimes disingenuously termed ‘Cap & Trade’Today,

February 25, 2009, James Hansen testified before the Committee on Ways and Means, United States House of Representatives. His suggestion to implement a carbon tax with 100% dividend is an ingenious way to speed up the changes away from fossil fuels that are so urgently needed. Currently, Europe is proceeding with the Cap and Trade System. But it might be useful to review its effectiveness critically and to ensure that the system we implement is indeed able to ensure the changes that are needed. Because if the system does fail, we might not have time to rectify our errors.

In the following is the reprint of Dr. Hansen’s testimony:

Our planet is in peril1. Climate disruption threatens everyone, but especially the young and the unborn, who will bear the full brunt through no fault of their own. Recent science makes it clear that if we continue to burn most of the fossil fuels we will leave our children a deteriorating situation out of their control.

One scientific conclusion is crystal clear1: we cannot burn all of the fossil fuels without setting in motion a process of climate disruption that threatens the very existence of many species on our planet. This potential injustice is not limited to the innocent species we exterminate. The greatest injustice is to our own species2 – our children, grandchildren and the unborn, and people who live with nature, who we may call ‘undeveloped’, indigenous people who want only to live their lives without bearing burdens that we create.

The President deserves credit for recognizing that our planet is in peril, and his administration deserves credit for initial steps that may lead to increased vehicle fuel efficiencies and constraints on coal emissions. These steps are important. Greater fuel efficiency, e.g., is essential. But it must be recognized that these steps address the symptoms of the problem, not the root cause. Moreover, these steps will fail if the root cause is not addressed.

The root cause is our failure to make polluting fossil-fuel energy more expensive than clean energy. Instead we subsidize fossil fuels!

We must put a price on carbon emissions, a rising price. If we do this promptly we can stabilize the atmosphere and climate, with healthier air, improved agricultural productivity, clean water, an ocean providing fish that are safe to eat, with a reversal of the trend toward increased birth defects and other consequences of fossil fuel pollution in our air and water.

Fossil fuels are finite. We must find clean energies to replace them. Why not do that sooner, rather than digging for every scrap of carbon, and in the process destroying the future of our children and grandchildren?

The reason “why not” is this: the fossil fuel industry has enormous power over our governments, through their lobbying and “campaign” contributions. Yet you and other leaders are elected to represent the public. The public expects you to look out after their children, to preserve creation, our children’s heritage. Instead we are robbing money from our children’s pockets and piggybanks, borrowing money from our children to fund subsidies for the fossil fuel industry.

This selfishness is not limited to America. I wrote to government leaders of several countries that are believed to be among the “greenest”, one of them led by a physicist. I thought they would understand the clear scientific rationale that we must phase out coal use and move beyond fossil fuels, if we are to preserve a planet resembling the one we inherited from our elders. But I learned that the fossil fuel industries in those countries have enormous power, as they do here. Those governments are not green – they are black, coal black.

Carbon Tax and 100% Dividend

If we continue to subsidize fossil fuels and do not impose a carbon price, our automobile manufacturers will likely fail – they are being instructed to build fuel-efficient vehicles, which will be in limited demand as long as fossil fuels do not have to pay their true costs. Similarly, “renewable energy portfolios” for utilities will rip off the public (rate-payers), with marginal benefit for the environment. Energy-inefficient buildings will continue to be built. And so on.

The most honest effective way to achieve a carbon price capable of driving our economy and our society to the clean world of the future is “Carbon Tax with 100% Dividend”3. For example, a carbon price equivalent to $1/gallon of gasoline (about $115 per ton of CO2), for 2007 rates of fossil fuel use in the United States, generates $670B. If we give one share to each legal resident age 22 and over, one half-share to college age youth (18-21), one half-share to the parents of each child up to two children per family, that yields about 224 million shares in 2007 (this could be off by ~10%; I could not find optimum census data). So the 100% Dividend for a $1/gallon tax rate ($115 per ton of CO2) is:
Single share: $3000/year ($250 per month, deposited monthly in bank account)
Family with 2 children: $9000/year ($750 per month, deposited monthly in bank account)
The tax rate and dividend should increase with time.4 This approach would reduce demand for fossil fuels, driving down the price of fossil fuels on the open market. The next time the price of gasoline reaches $4/gallon most of that $4 should be tax, with 100% of that tax returned to the public as dividend. Instead of our money going to the Middle East and other foreign places, most of it would stay at home.5

This tax, and the knowledge that it would continue to increase in the future, would spur innovations in energy efficiency and carbon-free energy sources. The dividend would put money in the hands of the public, allowing them to purchase vehicles and other products that reduce their carbon footprint and thus their taxes. The person doing better than average would obtain more from the dividend than paid in the tax. The tax would affect building designs and serve as an effective enforcer of energy efficient building codes that are now widely ignored. The need to replace inefficient infrastructure would spur the economy. Tax and 100% dividend can drive innovation and economic growth with a snowballing effect. Carbon emissions will plummet far faster than alternative top-down regulations. Our infrastructure will be modernized for the clean energy future. There will be no need to go the most extreme environments on Earth for the last drop of fossil fuel, to squeeze oil from tar shale, or develop other unconventional fossil fuels.

A tax on coal, oil and gas is simple. It can be collected easily and reliably at the first point of sale, at the mine or oil well, or at the port of entry. This approach also implies the fastest most effective way to international agreements. A proportionate duty should be applied to any imported products whose manufacture produced carbon emissions. The system could impose presumptive border taxes, allowing individual firms to prove that a lower rate should apply.6

A carbon tax will raise energy prices, but lower and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead. Effects will permeate society. Food requiring lots of carbon emissions to produce and transport will become more expensive and vice versa. There will be a growing incentive for life style changes needed for sustainable living.

One may ask: is there sufficient technology today, and just around the corner if the economic incentive exists, to allow phase out of coal emissions in the near term and other fossil fuels on a longer time scale? The answer is a clear “yes”, as discussed in a workshop report7 (this report is a draft – criticisms would be welcomed). Indeed, Stoft8 shows that ‘Tax & Dividend’ supports and makes more effective appliance efficiency standards and renewable portfolio standsrds. However, in order for energy efficiency and non-fossil energies to rapidly supplant fossil fuels, the carbon price should be substantial and rising.

Tax & Trade (a.k.a., ‘Cap & Trade’, pseudonymously and sometimes disingenuously)

‘Cap & Trade’ increases costs to the public as does ‘Tax & Dividend’, but without the dividend. Thus it should be termed ‘Tax & Trade’.9 Part of the reason for the pseudonym is to avoid the stigma of a tax, under the presumption that the public is too gullible to figure it out. Other parties support ‘Cap & Trade’ because they hope to profit – it is a give-away to special interests, who feel, based on extensive empirical evidence, that they will be able to manipulate the program through their lobbyists. Except for its stealth approach to taxing the public, and its attraction to special interests, ‘Cap & Trade’ seems to have little merit.

Surely the proponents of ‘Cap & Trade’ are not all special interests and their lobbyists, or people who hope to make millions on Wall Street from price volatility and manipulations. That is surely right. Many, without looking closely at the details, assume that the successful ‘Cap & Trade’ used to help solve the acid rain problem, might be a good model for the climate problem. Acid rain was much simpler, partly because it was a program that required existing facilities to employ a simple low-cost solution. The program did not require investments in new infrastructure or innovation. The acid rain program required a group of existing facilities, with extremely accurate emissions measurement, to make minor burner modifications and use readily available low-cost low sulfur coal. A few new rail lines were built and some facilities purchased more efficient scrubbers.10

Caps have not generally been applied at the mine or well-head, rather further downstream. Proponents of ‘caps’ say they will try to push them upstream. That would open up consequences that now should be unacceptable to Americans: volatility, manipulation, and trading floor millionaires. Where would the millions come from – the common person, of course, the rate payer, the public.

The abject failure of Cap & Trade was illuminated for all to see by the Kyoto Protocol, the granddaddy of all Cap & Trade schemes. Even countries that accepted the toughest emission reduction targets, such as Japan, saw their emissions actually increase. The problem is the inevitable loopholes in such complex approaches, which take years to negotiate and implement.

The Congressional Budget Office11 provides a comparison of carbon taxes to cap-and-trade. That report concludes that a given emission reduction could be achieved at a fraction of the cost via a carbon tax, as opposed to cap-and-trade. Another useful comparison is also available.12

The worst thing about cap-and-trade, from a climate standpoint, is that it will surely be inadequate to achieve the sharp reduction of emissions that is needed. Thus cap-and-trade would practically guarantee disastrous climate change for our children and grandchildren.13

The only solution to the climate problem is to leave much of the fossil fuels in the ground. That requires a high enough carbon price that we move on to our energy future beyond fossil fuels.

Summary

The honest approach, the effective approach, for solving the global warming problem would be a tax with 100% dividend. The public is not stupid. They will understand that the hooks and eyes of a less comprehensive more dissembling approach will be put there for some reason other than saving the future for their children.

One of the biggest advantages of the Tax and Dividend approach is its simplicity, which would allow it to be introduced quickly. The Kyoto-like Cap & Trade is notoriously slow to negotiate and implement, as well as being ineffective in the end. A related point is that an effective international accord could be implemented with only a few of the major economies. Import duties on countries not imposing a comparable tax would surely bring broad rapid compliance.

1 Clarification of the climate threat could usefully be obtained by requesting a report from the National Academy of Sciences. The Academy, established by Abraham Lincoln for the purpose of advising the President and Congress on important technical matters, is widely recognized as the most authoritative scientific body in the world.
2 The Sword of Damocles: http://www.columbia.edu/~jeh1/mailings/2009/20090215_Damocles.pdf
3 http://www.columbia.edu/~jeh1/mailings/2008/20080604_TaxAndDividend.pdf
4 The tax rate should increase until fossil fuel energy is not competitive with clean energy. The tax gathered, and thus the dividend, will initially increase as more clean energy enters the mix. But the dividend will enventually go down, as clean energy becomes ascendant. That is okay, because, as a result of competition, economies of scale and innovation, clean energy prices will fall. In addition, increased energy efficiency and conservation will reduce energy use per person.
5 Two years ago I sat next to the Saudi Arabian Ambassador to the United States at a dinner. He became upset, politely, when I mentioned this concept of a carbon tax. Clearly, he understood the implications. He did not seem too concerned that it would be adopted – he probably took it for granted that fossil fuel special interests could overcome any wisdom of our law-makers.
6 Metcalf-Weisback-Design of a Carbon Tax
7 P. Kharecha et al. http://www.columbia.edu/~jeh1/2009/ECWorkshop_report.pdf
8 S.E. Stoft http://stoft.com/ebooks/cap-secrets.pdf
9 Much of the support for Cap & Trade stems from the desire to avoid the term “tax” and create a real “cap” or declining limit on emissions. However, as shown in the European Emissions Trading Scheme and the Los Angeles RECLAIM program, among others, weaknesses in the cap-and-trade concept make it inapplicable to the climate crisis. Specifically, over-allocation of credits, lack of accurate measurement, fraudulent outside offsets, and the failure to create true incentives for early investments in clean energy technology and infrastructure will doom the prospects for real emissions reductions.
10 http://www.carbontax.org/blogarchives/2009/02/21/what-worked-for-acid-rain-won%e2%80%99t-work-for-climate-change/
11 Congressional Budget Office, “Policy Options for Reducing CO2 Emissions,” February 2008, http://www.cbo.gov/ftpdocs/89xx/doc8934/02-12-Carbon.pdf
12 L. Williams and A. Zabel, http://www.carbonfees.org/home/Cap-and-TradeVsCarbonFees.pdf
13 Brattle Group Report, CO2 Price Volatility: Consequences and Cures, http://www.brattle.com/_documents/UploadLibrary/Upload736.pdf

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