Carbon Fee and Dividend Is Proposed by Conservative Economists

Background.  U. S. President Donald J. Trump has called global warming a hoax, and opposes policies that would combat its causes and effects.  He has assembled a cabinet whose members, as heads of departments that are relevant to this issue, hold opinions that are consistent with his.  They seek to reverse the policies of the Obama administration that mitigate global warming and its harms.

Carbon Fee and Dividend.  On February 8, 2017, three conservative economists who held high level positions in earlier Republican administrations published the op-ed “A Conservative Case for Climate Action” in the New York Times .  The authors are Martin S. Feldstein, formerly the chairman of the Council of Economic Advisers under President Ronald Reagan; Ted Halstead, the founder and chief executive of the Climate Leadership Council; and N. Gregory Mankiw, formerly the chairman under President George W. Bush. 

The op-ed is based on a more extensive paper made public the same day, by these writers and several other conservative or Republican economists.  Three other authors in this group, former Secretary of State under President George H. W. Bush, James A. Baker III;, former Secretary of State under President Ronald Reagan, George P. Shultz; and former secretary of the Treasury under President George Bush, Henry M. Paulson Jr. also discussed their plan.  They said that imposing an economy-wide tax on carbon emissions from burning fossil fuels is “a conservative climate solution” since it relies on free-market principles.

Importantly, and apparently in opposition to President Trump, the writers make clear their acceptance of “the very real dangers of global warming”.  They state that “this is the perfect time … to address the dangerous threat of climate change”, and support limiting emissions of the major greenhouse gas, carbon dioxide (CO₂).

Their goals are fourfold, to be achieved by simultaneously putting in place four measures in their “ideal climate policy”. 

1.    To reduce the rate of carbon emissions, the authors propose a tax on carbon, suggesting a level of $40/ton of emitted CO₂ at the outset, and rising in successive years. The authors state this would send an economic signal both to consumers and to businesses to lower their use of carbon fuels.

2.    To help working class Americans the proceeds from collecting the tax would be distributed equally back to citizens as a quarterly dividend.  For example, in the first year, a family of four might receive $2,000.

3.    The plan would help promote economic expansion in the U. S.  It would protect international commerce by subsidizing exports to countries that don’t have similar policies, and placing tariffs on imports from such countries.  The higher carbon pricing would stimulate growth in renewable energy enterprises, and in energy efficiency, which provides growing job opportunities.

4.    The plan would provide regulatory certainty for businesses and investors, since it would eliminate the need for regulatory policies such as former President Obama’s Clean Power Plan (which is currently under court challenge) to achieve reductions in annual emission rates.
 

Analysis

The authors cite U. S. Treasury, Office of Tax Analysis, Working Paper 115, January 2017, as concluding that the dividend would wind up benefiting the bottom 70% of taxpayers, or about 223 million residents. That dividend compensates for having paid the carbon tax.  The Working Paper estimates that during the first year the tax would add about $0.36 per gallon of gasoline, for example.  This increase pales by comparison to the gyrations of the retail price for gasoline during the past few years. 

The tax has the effect, at the instant of purchasing a carbon-based fuel, of discouraging excessive use of the fuel because of the higher price.  The dividend, on the other hand, has the effect of expanding spending power at a time considerably removed from the time of the restraint in purchasing.  Stimulation of spending will have a beneficial effect on the national economy, offsetting the loss of spending due to collecting the carbon tax at purchase time.

The authors also find, upon analysis, that the carbon tax and dividend, at the starting value of $40/ton of emissions, would reduce the carbon emissions rate to half the rate from all the regulation-based reduction programs put together by President Obama’s administration.

Citizens Climate Lobby (CCL) is an organization whose principal goal has been to lobby Congress to enact a revenue-neutral plan, essentially identical to the one proposed by the authors of this op-ed.  CCL commissioned Regional Economic Models, Inc. (REMI) to analyze the effects of the CCL carbon fee and dividend plan.  After running a model, REMI found that after 20 years of operation the program is predicted to provide a) a 50% reduction in the CO₂ emission rate, b) about 2.8 million new jobs being created as a result of the stimulating effect of the dividend, and c) 230,000 fewer premature deaths among the population as a result of reductions in air pollution from disease-causing agents.

British Columbia, the Canadian province, has had a very similar regime in operation since 2008.  Instead of a direct dividend, British Columbia uses the revenue to abate other classes of taxation, including the corporate tax rate.  The effect broadly is comparable to that of a dividend, namely, reinjecting funds back into the provincial economy. 

The New York Times reported, on March 1, 2016 that the carbon tax rose from CA$10 in 2008 to CA$30 in 2012 (about US$22.20 in 2016), while emissions fell over that time from 5 to 15% even as there were minimal effects on overall economic activity.  The Times stated “a carbon tax is the most efficient, market-friendly instrument available in the quiver against climate change”.  The report also quoted Mary Polak, British Columbia’s environment minister, as saying the tax “performed better on all fronts than I think any of us expected”. 

Conclusion

Martin Feldstein James Baker and their colleagues have provided a useful and timely recommendation in their op-ed articles.  A carbon tax is far easier to administer than the other major mitigation regime, cap-and-trade (in force in California and proposed to the states as a possible measure under President Obama’s Clean Power Plan).  The dividend ensures that the overall effect of the carbon tax is revenue-neutral.  As seen from British Columbia’s experience, a carbon tax and dividend regime would clearly produce reductions in the rate of greenhouse gas emissions, and indirectly stimulate new enterprise creation, together with new jobs, in order to mitigate global warming and promote energy efficiency. 

It is time for President Trump and the conservative majorities in the U. S. Congress to recognize the reality of global warming and its dangers, and to enact meaningful federal legislation to minimize future emissions.

© 2017 Henry Auer