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The best way forward on climate change: Toward a Carbon Tax and dividend
Rosalind Dixon & Richard Holden
Rosalind is professor of law, UNSW Sydney and Director of the Gilbert + Tobin Centre of Public Law & Richard is professor of economics, UNSW Sydney
It is hard to find a serious person who has confronted the science on climate change who doesn’t accept the reality of anthropogenic global warming. What is in dispute is what to do about it. Should fossil fuels be banned? How fast can we transition to a zero-net emissions economy? What’s the right plan?
A solution is a “Carbon Dividend”: take the proceeds of a carbon tax and redistribute them evenly to all citizens
At the heart of this dispute is an uncomfortable tradeoff. While emissions are bad (they contribute to rising temperatures and sea levels, and extreme weather events) they are also good (they contribute to economic wellbeing and lifting people out of poverty).
Balancing the good and bad of greenhouse gas emissions is at the core of an efficient and economically just approach to climate change.
Since the 1970s, economists like 2018 Economics Nobel Laureate William Nordhaus have proposed a carbon tax that would factor in the social cost of greenhouse gas emissions into the market’s price mechanism. It’s the best way to balance good and bad effects of emissions.
But it has one important flaw. It makes the things we consume more expensive. This is a particular burden on the less well-off who can see their fuel and heating bills skyrocket under a carbon tax. The yellow-vest movement is not hard to understand in this context.
But offering direct compensation can undo the whole purpose of a carbon tax—to send price signals to change individual behavior. A solution is a “Carbon Dividend”: take the proceeds of a carbon tax and redistribute them evenly to all citizens. This gives people an incentive to reduce their emissions but compensates them for price increases stemming from the tax.
This idea was first formulated by the Climate Leadership Council (CLC), which includes luminaries of different political persuasions such as Larry Summers, George Schultz, James Baker and Janet Yellen. Twenty-seven Nobel Laureates, 4 Federal Reserve Chairs, and thousands of economists have endorsed the plan. Big energy companies—the largest emitters of carbon—also support it.
It’s a market-based approach to addressing climate change, which provides incentives for more efficient and lower-carbon energy
Last year, as part of the UNSW Grand Challenge on Inequality, we launched the Australian Carbon Dividend Plan, inspired by the CLC. We estimate that the average Australian household would actually be $585 p.a. better off, and bottom 20%-income households $1300 p.a. ahead. If households also cut their energy consumption, they would be even better off.
It’s a market-based approach to addressing climate change, which provides incentives for more efficient and lower-carbon energy, and which provides progressive compensation directly to households.
AGAINST
The False Promise of the Carbon Tax
No policy tool is sufficient to fight climate change. Climate change is a global phenomenon requiring a global perspective. In assuming a global perspective, we see that a carbon tax would at best be futile in fighting climate change and at worst be a grave injustice.
Any policy, including a carbon tax, that would forestall or hamper their access to electricity should be considered a nonstarter
Nearly 1 billion people across the world today live without electricity. Granting these people the liberty to pursue electricity—and the immense benefits it confers—is a moral imperative. For some of these people, options like solar power may be suitable. But for others, like most of the 200 million people in India without electricity, carbon-based energy provides the surest, more affordable path to power. Any policy, including a carbon tax, that would forestall or hamper their access to electricity should be considered a nonstarter, as electricity has proven itself an accelerator of human wellbeing, as measured by outcomes in areas such as health and education.
If we respect that human beings living in the less-developed parts of the world have the moral license to improve their lives through industrialization, we must also realize that policy tools enacted solely in industrialized countries would have but a miniscule effect in mitigating climate change. In 2018 China accounted for 50 percent of global coal consumption; India accounted for another 12 percent. The European Union and the United States combined consumed just 14.5 percent. Despite the pledges of politicians in Europe and North America to force us off of carbon-based fuels with policies like a carbon tax, the global economy’s appetite for reliable, accessible energy will persist. According to the International Energy Agency, the use of coal, oil, and natural gas will not diminish, but grow 16 percent by 2040.
A carbon tax would not stop climate change. But it would make each of us a bit poorer and a bit less capable of managing climate change’s impacts.
We ought to shift our attention towards positioning humanity to withstand the challenges that climate change presents
Instead of focusing our attention on tweaks that we hope will alter economic decision-making at the margins to reduce our emissions by a few percentage points, we ought to shift our attention towards positioning humanity to withstand, and indeed prevail through, the challenges that climate change presents. The climate change policy strategy that best promotes humanity’s wellbeing is not a carbon tax or any other energy-rationing mechanism, but rather it is one of free-market adaptation.
