Top

The Case for Carbon Dividends

einstrong.org / The Case for Carbon Dividends

The Case for Carbon Dividends 

by James Boyce

Summary by Inday Ransom

1- Why Cut Carbon?

As of today, humanity is pumping more than 1,000 tons of CO₂ per second. Scientists predict that the average global temperature will rise to 3.5℃ by the end of the century if this continues. “The last time the Earth was that hot was in the mid-Pliocene epoch, about 3 million years ago.” (pg. 310).

The World Health Organization found that nearly 3 million premature deaths in 2012 were connected to outdoor air pollution. China, India, and Eastern Europe being affected the most. Even high-income places are severely affected, such as the US with 38,000 deaths annually, and the UK and Germany with 16,000 deaths. Air pollution is now the number one cause of premature deaths worldwide. 

Health damages caused by climate change have been called the “social cost of atmospheric release.” The Organization for Economic Co-Operation and Developmemts calculates that the health cost of air pollution is $500 billion a year in the US, $200 billion a year in Japan, and more than $1.7 trillion a year for the 35 countries involved in the OECD.

The Paris Agreement in 2015, concluded that global temperatures must be limited to 1.5℃ and 2℃. This would prevent 150 million deaths between now and the end of the century. 

Not only will cutting greenhouse gasses help global health, investment in renewable energy will create more jobs than the same amount put into the fossil fuel industry. Here are job gains from the clean energy industry:

                        

Investing in renewable energy will create more jobs than it will destroy. Robert Pollin and his colleagues at the University of Massachusetts Amherst, believe it will take 1.5 percent of global GDP, or $1.5 trillion, invested in clean energy annually to reduce fossil-fuel use by 35 percent in twenty years. 

Of course with mass job loss there should be protection for fossil fuel workers, “For both reasons, explicit policies will be necessary to safeguard the livelihoods of those whose jobs disappear. The late trade unionist Tony Mazzocchi put it well: ‘Those who work with toxic materials on a daily basis, who face the ever-present threat of death from explosions and fires, in order to provide the world with the energy and the materials it needs, deserve a helping hand to make a new start in life.’” (pg. 21). The cost of this transition, called the “Just Transition” (guaranteeing employment, compensation, and assistance), would be $500 million per year in the United States, less than 1 percent of the investment cost. The European Parliament passed a bill in 2017 that would allocate some EU revenue into the Just Transition Fund to help displaced fossil-fuel workers. 

Another aspect of job creation would be in the “restoration economy,” which aims to restore land that has been decimated by coal mining; this sector brings in 162,000 jobs, much more than in the coal industry. 

 

2- Why a Price on Carbon? 

Boyce describes this scenario: all parking is free and unregulated, anyone can park anywhere whenever, at no cost. Without price and parking regulation, spaces become limited, streets become obstructed, and congestion could make it more difficult to find space. 

To relieve this problem, cities enact parking fees, such as meters and parking lot fees. As well as rules of where you cannot park, and reserving spaces for people with disabilities. 

This solution can be applied to carbon emissions. If prices on CO₂ emissions were higher people would consume less. When fuel prices increase, a demand for better public transportation increases. And when prices go up, 

“The good news is that carbon pricing systems now cover about 20 percent of global fossil carbon emissions, a figure that will rise to around 30 percent once China fully implements its national emissions trading system. The bad news is that, even then, 70 percent of world emissions still won’t be priced.” (pg. 650). The current prices of crude oil is not high enough to prevent people from consuming less, and transitioning to clean energy and innovation. As shown here:

The increase in crude oil leads to an increase in carbon price. A carbon price of US $230/mt of CO2 would be needed to raise the crude oil price at the peak market value in 2008. The reason for why prices are so low today is because politicians are afraid of public backlash. Protesters believe that the increase in prices will hurt the average citizen the most. 

Boyce explains that the prices should be determined by scientists rather than economists. Economists’ efficiency criterion recommend prices much lower than recommended prices than the safety criterion by scientists. Economists recommend prices starting at about $37/mts of CO₂ in 2020, to $100/mts in 2050.

Source: Based on data in William D. Nordhaus, “Revisiting the social cost of carbon,” Proceedings of the National Academy of Sciences 114/7 (2017), table 1.

 

 The necessary price to hold the increase in average global temperatures at 2.5℃ would start at $230/mts CO₂ in 2020 to $1,000/mts by 2050. The best way to combat carbon emissions is to establish a cap on total emissions that decline over time, and every year the sales of permits can only go up to that limit.  

One solution that will ensure emission reductions would be to establish a set limit on the burning of fossil fuel, “This restriction in supply causes fossil-fuel prices to rise above what they otherwise would have been. The price of carbon is the result of the difference between fuel prices with and without this limit.” (pg. )

 

3- What is Carbon Rent?

After the 1973 war between Israel, Egypt and Syria, the Organization of Arab Petroleum Exporting created an embargo on countries that supported Israel. By 1974, the world oil prices quadrupled to $12 a barrel. Five years later, a second wave hit, after the Iranian revolution and Iran-Iraq war, to nearly $40 a barrel.

Because of the increased price and decreased supplies of oil, world consumption in 1979-80 dropped by 4 percent compared to the rise of 9 percent in 1973-74. When supplies are limited, prices go up—thus the world has a quickstart in the fight against climate change. 

Unfortunately, higher prices hurt consumers the most as they have lower income, but increase the profits of the rich. However, because the rich consume more, they would pay more than poorer consumers. One solution would start the carbon price at $50/mt CO₂ in the first year, and increase 5 percent annually. By the tenth year it would be at $80/mt CO₂, about 65 cents to the price of a gallon of gas. Over the next decade cumulative carbon rent— “the extra money that is paid by consumers as a result of policies that curb emissions of fossil carbon”—would hit $2.5 trillion, equal to $200 per person yearly.

“To achieve emission reductions of 5.22 percent per year (this is the constant rate required to bring about an 80 percent total cut in thirty years), fossil-fuel prices would rise at 8.66 percent per year (an elasticity of −0.6).” (pg. 1043). This scenario would start at $485/mt of CO₂ in the tenth year, pushing $6 per gallon of gas and would exceed $8 trillion in carbon rent, about $2,400 per person annually. 

 

4- The Carbon Dividend 

 

In the 1980s, Alaska enacted the Alaska Permanent Fund, an investment in the state’s oil royalties, paying annual dividends of $2,000 to every resident. “The distinctive form of property created by the Alaska Permanent Fund deserves a name of its own. I call it universal property. It is common property owned in equal measure by all members of the society. Universal property is individual, perfectly egalitarian, and inalienable.” (pg. 1341)

Boyce explains if Alaska treats the atmosphere as universal property, everyone else can. Where those who consume less, pay less in carbon rent than they get back in dividends, and heavy consumers pay more than they get back. By doing this, the carbon prices combined with dividends actually benefit consumers, especially those of low-income. 

Another option is to give out dividends to the people, and allow local governments to keep a percentage of that money. In 2009, Senators Maria Cantwell (Democrat, Washington), and Susan Collins (Republican, Maine) proposed a national legislation on carbon dividends. Their proposal included 75 percent of the money from permits (under the cap) back to the people, and allocate 25 percent into a trust fund for government spending. The 25 percent would fund workers and communities, research and development in clean energy, climate change adaptation, and projects to reduce emissions. The problem with this is it’s essentially a head tax. But if dividends are taxed as income, the wealthy would return more than the poor.