Pricing Carbon to Reduce Emissions, Create Dividends

Cap and trade is dead — long live the Green Dividend.

That was the consensus of a conference on pricing carbon held late last year at Wesleyan University that produced the “Wesleyan Statement,” a kind of working manifesto on carbon-pricing principles.

According to the resulting statement, an effective pricing strategy would be “upstream” (ie paid by the supplier), calibrated to reach emissions levels recommended by climate scientists, and steadily rising so that businesses and individuals can plan.

Speakers advocated a direct, transparent price on carbon as an economic incentive for reducing fossil fuel use, with revenues returned to US taxpayers. Up for debate was whether this would be in the form of a direct payment (a “green check”) or tax reduction (“tax shift.”)

Cap and trade, the cornerstone of the climate bill that squeaked through the House last summer only to die in the Senate, got a drubbing at the spirited event, which drew several hundred scholars, four members of Congress (including one Republican), students and activists, including climate-movement marquee names such as James Hansen and Bill McKibben. The carbon-limiting plan was criticized as overly business-friendly and, in the words of US Rep. Jim McDermott (D-Washington), “arcane, obtuse and abstruse.”

Two key arguments for pricing carbon are that emission-spewing oil and coal are cheap relative to renewables because the fossil fuel industry is subsidized by tax breaks, and does not pay its products' environmental and societal costs. People will continue to use fossil fuels as long as they're cheap. A price on carbon would provide a spur to reduce energy use while making renewable sources competitive.

Hansen (see his remarks here) and others said carbon pricing would make the fossil fuel industry pay its own costs, rather than kicking the oil can down the road. There should be a “fee applied at the first sale at the point of entry that covers all oil, gas and coal-with no leakage,” he said. “If the public and business community know the price will go up and stay up, there will be a quick response” in favor of renewable sources.

Hansen said that the hopeful news on climate change is that “if we phase out coal and extreme oil, [concentrations of] CO2 would peak at 420 parts per million and come down.” He called carbon pricing the “one silver bullet” we have to make this happen. Hansen suggested one way that bullet might be delivered would involve the courts, and earlier this month he joined a lawsuit seeking to force US government action on climate.

Any US action faces major political hurdles. Environmentalism as a partisan litmus test is new, said Elaine Kamarck, lecturer in public policy at Harvard's Belfer Center for Science and International Affairs. It wasn't until 1998 and the run-up to Al Gore's presidential campaign, she said, that the topic became associated solely with the Democratic Party, as Republicans positioned themselves strongly against environmental causes such as climate change. She urged climate activists to “broaden the conversation” to reach conservatives and other segments of the population, such as “all the people who are sick and tired of going to wars for oil.”

Former Republican Rep. Bob Inglis of South Carolina, who last June lost a primary bid for what would have been his seventh term in Congress, said Republicans should in theory support environmental action in line with the party's traditional emphasis on land and fiscal stewardship. “The GOP is losing credibility on national security because of [the climate] issue,” he said, a lonely refrain that likely contributed to his loss.

One common argument against putting a price on carbon is that it will impede an economic recovery, but that argument made little headway at Wesleyan. (Or among many proponents of renewables.) “Saying carbon pricing is too expensive implies that it’s optional,” argued economist Frank Ackerman of the Stockholm Environmental Institute. He pointed to the increasing cost of inaction. According to estimates in the Stern Review, the damages from unchecked climate change would amount to 5 percent or more of the global gross domestic product and would increase over time; yet, almost all of these damages can be avoided by spending 1 percent of global GDP on mitigation.

As for the nitty-gritty of redistributing this carbon dividend, James Handley of the Carbon Tax Center recommended a commensurate reduction of payroll taxes. “We can have a job-creating carbon tax by returning it the right way,” he said.

But author Peter Barnes, co-founder of the Working Assets Money Fund, suggests a program — the Sky Trust — modeled on the Alaska Permanent Fund with money sent to taxpayers electronically (“checks are so last century”). He noted that President Barack Obama lowered payroll tax withholding and no one noticed. “This is a strong argument why dividend is the way to go,” Barnes said. “It also gets the discussion out of the tax box, which is a very bad box to be in.”

Whether a carbon-pricing legislation manages to wend its way through the American political maze may be a moot point, Hansen says, as China may force the issue.

“There's a good chance China will adopt a carbon price because they want to phase out dirty energy,” he said. “They will be out in front on these technologies and want to sell them to the rest of the world.” China's adding a carbon duty to exports will provide a “strong incentive” to price carbon here, he said. Meanwhile, nations from Canada to Australia to South Africa are publicly grappling with carbon pricing.

“Washington will be inhospitable for a while” to action on climate change, said author and climate activist McKibben. But a price-and-dividend model, he said, could be a “tool that can bend that political reality. It's hard to bend political reality. But it's harder to bend chemistry and physics.”