In a previous post, I discussed how cash transfers paid from carbon tax revenues (called “tax and dividend”) would be a net benefit to low- and middle-income households. However, the good achieved by a carbon tax is is sometimes questions, especially if most of the revenue is sent back to households as a dividend rather than invested in new renewables and efficiency measures.
In addition to redistributing income to poorer households, a carbon tax and dividend policy plays two key roles in decarbonization. First, a carbon tax provides an incentive for emissions reductions by making dirtier energy sources more expensive. That way, individuals and businesses will want to purchase cleaner energy and more energy efficient products. Columbia University’s Center on Global Energy Policy estimated that starting with a $15/ton tax and increasing it by $10/ton each year could reduce emissions by 36-38 percent of 2005 levels by 2050. Achieving further greenhouse gas reductions will require governments to act. Businesses will need government to reduce the riskiness of green investment, provide money for researching and developing green technologies, and provide direct investment in the riskiest ventures. This is the same approach the U.S. government used to support the development of the internet and GPS from their invention into enormous retail markets. Without similar government assistance, a carbon tax would still increase the price of dirty energy but without a lending a helping hand to make green energy less expensive and more accessible.
A carbon tax also advances decarbonization by reducing direct and indirect subsidies to fossil fuel producers. The International Monetary Fund estimates that these subsidies added up to $5.2 trillion in 2017. Direct subsidies reflect the difference between what we actually pay for fossil fuels and the full cost of fossil fuels, including environmental damages. A carbon tax increases the price of dirty energy, narrowing or even erasing this gap. But fossil fuel production is also indirectly subsidized when housing, land-use, and transportation decisions enable the use of more fossil fuels. For instance, outright bans on dense multifamily housing in suburban neighborhoods, parking requirements in city centers, and a lack of reliable public transit increase automobile use and congestion during daily commutes. Zoning and transit policies that indirectly subsidize fossil fuel consumption, however, are difficult to change quickly; they are politically contentious, overseen by thousands of local governments, and often take years to go into effect. Some countries, states or cities will embrace greener, denser, transit-oriented development faster than others. A carbon tax ensures that the costs of transition fall on those areas that move more slowly, and therefore emit more carbon dioxide. For communities that fail to pursue denser development, the tax will at least incentivize electric vehicles, public transportation, rooftop solar generation, and efficient appliances. Remitting its revenue via a dividend would compensate low- and middle-income households in those areas, while freeing them up to purchase greener goods and services on their own initiative.
A carbon tax is no substitute for the hard political fights necessary to build cleaner generation, decommission dirty fuel sources, and ensure a just transition for marginalized communities and workers in fossil fuel industries. Those efforts will not automatically happen simply by putting a price on carbon emissions. But those fights will be made easier if a tax and dividend is passed. And with the time limit we face, that’s no small thing.
