Carbon Dividends

On June 1st, in an address from the White House Rose Garden, President Donald Trump announced that the United States would withdraw from The Paris Agreement. The remaining parties reacted with anger and an even stronger resolve to hold the US accountable for its pledge. One way that the international community could retaliate is to levy a border-adjustment tax on the carbon content of American exports. If faced with such a pressure, the Trump administration would need a plan to replace the Obama-era regulations that it has repealed.

In February, the Climate Leadership Council (CLC) provided a plan titled “The Conservative Case for Carbon Dividends“. The section within the paper titled “The Need for a Conservative Climate Solution” reads:

Mounting evidence of climate change is growing too strong to ignore. While the extent to which climate change is due to man-made causes can be questioned, the risks associated with future warming are too big and should be hedged. At least we need an insurance policy. For too long, many Republicans have looked the other way, forfeiting the policy initiative to those who favor growth-inhibiting command-and-control regulations, and fostering a needless climate divide between the GOP and the scientific, business, military, religious, civic and international mainstream.

Now that the Republican Party controls the White House and Congress, it has the opportunity and responsibility to promote a climate plan that showcases the full power of enduring conservative convictions. Any climate solution should be based on sound economic analysis and embody the principles of free markets and limited government. As this paper argues, such a plan could strengthen our economy, benefit working-class Americans, reduce regulations, protect our natural heritage and consolidate a new era of Republican leadership. These benefits accrue regardless of one’s views on climate science.

In short, the CLC admits that climate change is real (though doubts that it is driven by human activity) and that climate policy is inevitable in the United States. So, instead of leaving it to the next Democratic Congress to pass legislation that actually addresses climate change, the “Grand Old Party” should take the opportunity to pass legislation that supports its “conservative convictions” instead.

The plan has 4 pillars:

  1. A carbon tax implemented at the first point where fossil fuels enter the economy, beginning at $40/ton and increasing steadily over time.
  2. All the proceeds from this carbon tax would be returned, tax-free, to the American people via dividends.
  3. Border adjustments levied on the carbon content of imports and exports.  Proceeds from these fees would be added to the carbon dividends.
  4. Elimination of regulations that are no longer necessary upon the enactment of the previous three pillars.

On a positive note, I have absolutely no issue with pillar number one. However, the same cannot be said for the remaining three pillars, especially pillar number two.

Revenue-neutral carbon taxes – wherein all proceeds are returned to the public – can make intuitive sense. If the public knows that a carbon tax will increase steadily over time, they are incentivized to invest in technology that will enable them to pollute less in order to pocket more of their tax-free dividends. The problem is that this intuition assumes the rationality of the consumer. The Department of Treasury estimates that the bottom 70% of Americans would receive more in dividends than they would pay in carbon taxes. If 70% of the country is benefiting financially from the carbon tax without changing their behaviour, can you expect them to put in the effort and money to reduce their emissions?

A similar revenue-neutral carbon tax was implemented in the Canadian province of British Columbia (BC) in 2008. In 2007, the province of Quebec implemented its own carbon tax (which I will call revenue-controlled) with revenue being reinvested into energy-efficiency programs in public energy and transit. The results: greenhouse gas (GHG) emissions reduced by 3% in BC compared to 8% in Quebec from 2008 to 2015 and gross domestic product (GDP) increased by 13% in BC compared to 8% in Quebec while population increased by 3% in BC and 2% in Quebec between 2012 and 2015 (population data for 2008-2011 wasn’t available on the Statistics Canada website).

 

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In order to ideally test the efficacy of British Columbia’s revenue-neutral carbon tax, I would need to compare its performance to a simultaneously but independently implemented revenue-controlled carbon tax in the same province, which is impossible. Although the comparison to Quebec’s carbon tax is not ideal, it is still valuable. It demonstrates that a revenue-neutral carbon tax is likely inferior to a revenue-controlled carbon tax at reducing emissions. What it does do better is stimulate the economy; one of the foremost “conservative convictions”.