Earlier this month, a group of conservative statesmen, venture capitalists and mainstream economists calling themselves the Climate Leadership Council (CLC) unveiled a plan which they touted as the perfect vehicle for climate action under a Trump administration. Indeed, in a New York Times op-ed, the report’s lead authors went so far as to claim that their proposal “aligns perfectly with President Trump’s stated agenda.”
Even if such optimism were warranted in the face of Trump’s appointment of climate denialists to his cabinet, the CLC plan suffers from a basic design flaw that seriously dampens its prospects. In short, it calls for a tax on carbon emissions that would start around $40/ton and gradually rise to encourage cutbacks. The Treasury would then rebate revenue from the tax to the public in the form of monthly dividend checks. Hence the name “tax and dividend.”
If you’re doubting that something blatantly referred to as a tax on fossil-fuels could find friends among the small-government ideologues and pipeline-pushers of the GOP Congress, you’re not alone. During the campaign for Obama’s cap-and-trade bill in 2009, Republican opponents adopted the habit of deriding it as “cap-and-tax.” The bill’s carbon pricing mechanism had nothing to do with a tax, yet simply framing it as such was enough render it politically toxic in the eyes of conservative lawmakers.
Nevertheless, the CLC authors assure us that theirs is the “right strategy for the political moment.” In all fairness, there is a grain of truth to this claim. But, as I’ll discuss later, that’s thanks entirely to the dividend component. The tax on the other hand, is not only bound to face an uphill battle against congressional Republicans, but, on closer scrutiny, should also invite some serious shade from progressive quarters.
To see why, consider the nuts and bolts of this tax. In econo-speak it’s known as a Pigovian tax—after its originator Arthur Pigou. Its purpose is to fix what mainstream economists call a “market failure” wherein the price of pollutants does not reflect the full social costs of their use. With climate pollution, these costs include everything from the spread of diseases like malaria, to famine and damage from sea-level rise. Economists refer to such costs as “externalities” and the tax is one way of internalizing them into the price to reduce consumption of the polluting product.
But here’s where things get messy. For starters, calculating the tax requires calculating the social costs it’s supposed to reflect. Since the most severe of these lie decades off, this is no easy feat. It requires the mathematical modelling of future interactions between incredibly complex human and natural systems. Unfortunately, according to Sir Nicholas Stern, a top mainstream expert on the matter, the most commonly employed of these models are woefully unmatched for the task, given their blindness to critical climate risks such as sudden arctic methane releases. Worse, as the unorthodox or “heterodox” economist James Galbraith argues in his book The End of Normal, there’s good reason to doubt the predictive power of all mainstream macroeconomic modelling.
Even if they get the costs right, mainstream economists face yet another problem: How to balance the burden of those costs between contemporary consumers and future generations. Per their utilitarian moral framework, it isn’t optimal to expect today’s society to foot the full bill for our pollution. Instead, assuming a social preference for present consumption over future benefits, they employ a tool called a discount rate which basically devalues future costs in favor of today’s consumers.
Setting aside the shabby moral assumptions here, discounting also introduces an element of subjectivity into the pricing problem, thereby further compromising the reliability of the outcome. Ultimately, economists must select a discount rate they believe fairly balances the costs. Thus, those who believe models tend to dramatically underestimate the long-term burden will err on the side of future generations by choosing a discount rate closer to zero like Stern’s 1.4 percent; while the more conservative William Nordhaus prefers a higher 4.3 percent rate.
The CLC economists don’t explicitly point to the discount rate underlying their $40/ton tax. Yet since that number matches one drummed up by President Obama’s Interagency Working Group, it’s safe to assume the CLC number comes from the same 3-percent discount rate as the IWG number. This matters because under the various climate impact scenarios the IWG considered, 3 percent represented the moderate outcome, well below the worst-case scenario.
The upshot is that a carbon tax is not only a nonstarter in terms of good political optics, but also in terms of good economics, ethics and science.
That said, while the CLC should ditch the tax, the public dividend component of their plan is worth keeping. As they convincingly argue, the dividend is a brilliant way to overcome political resistance to a carbon fee by giving every American with a social security number an immediate economic stake in the program. For example, the CLC estimates that at their suggested $40/ton level, “a family of four would receive approximately $2000 in carbon dividend payments in their first year.” As with social security, payouts would go to rich and poor alike, thus generating sufficient popularity to protect the program against shifting political winds.
So how do we get to the dividend without the tax? The answer lies in a climate mitigation approach the CLC authors didn’t even bother to mention: cap and dividend.
As entrepreneur and environmentalist Peter Barnes envisaged it in his seminal work Who Owns the Sky?, the “cap” in cap and dividend provides a way to price carbon with far more simplicity and transparency than the tax. Under Barnes’ schema, the government caps the supply of fossil fuels allowed into the economy. Next, energy companies bid against each other to obtain production permits in a government-run auction, thus driving up the price of each unit of carbon. As the cap gradually descends, additional auctions occur, thus further increasing prices and steering the market toward cheaper renewables. Meanwhile, taxpayers receive their dividend checks quarterly, as with the tax plan. The result is a carbon price determined by the forces of supply and demand instead of the dubious mathematics and ethics of mainstream economics.
Moreover, unlike the ineffectual European cap and trade scheme, the Barnesian scheme disallows secondary markets for trading in permits or carbon “offsets.” This not only ensures the integrity of the cap but helps minimize regulatory red-tape.
Perhaps most importantly, cap and dividend would guarantee that reduction targets are ultimately met. This is because a descending cap mandates concrete cuts in carbon pollution year after year, whereas a tax will only work if the economists’ models prove to be correct.
Of course, despite the obvious advantages of the approach, some may ask why it’s worth pushing now at the expense of this improbable Republican policy proposal. Given the desperate need for climate action, if the CLC somehow managed to pull off a miracle and get their scheme to the President’s desk, wouldn’t that be a good thing?
If the goal of a climate bill is simply to commit the U.S. to symbolic action, then of course. Like Obama’s Clean Power Plan, the CLC plan would fall far short of achieving the reductions science says we need to stave off catastrophe. If we’re ever going to get serious about climate action, we’ll need a much more robust policy built around scientific targets and deep cuts. And when we’re ready to take that step, the constituency and bureaucracy that would spring up around the CLC scheme will render the policy shift that much harder. As we’re seeing with Obamacare, major polices develop a kind of inertia that can stymie efforts to repeal and replace.
The prospects for cap and dividend under GOP rule are certainly no bleaker, and are arguably brighter than those for a tax. Indeed, on the supposed conservative virtues the CLC authors ascribe to the tax, such as regulatory simplicity and market friendliness, the cap mechanism described above scores just as high, if not higher. What’s more, by emphasizing the cuts over the costs, and eliminating the problematic intergenerational ethics, the cap approach is one progressives could cheer about too.
Better then to fight to sustain an idea that might save us in the long run than to find solace in illusory beacon of hope.