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A carbon dividend really can slow fossil fuel use — under these conditions

- March 13, 2017
Photovoltaic power panels stand at Abaste’s El Bonillo Solar Plant on Dec. 2, 2015, in El Bonillo, Albacete province, Spain. (Pablo Blazquez Dominguez/Getty Images)

How should nations reduce the greenhouse gas emissions that are changing the Earth’s climate — especially when every citizen and business has plenty of incentives to keep driving, turning on the lights, plugging in their devices, and bumping up the heat or air conditioning?

One widely discussed option is a “carbon dividend.” In February, that option was proposed by a group of political conservatives called the Climate Leadership Council (CLC), whose roster includes such well-known names as James Baker and George Shultz. Prominent opinion leaders applauded the proposal, including the New York Times. But observers have overlooked how it resembles policies that the United States already has deployed.

Let’s examine what a carbon dividend actually is, and what range of carbon dividend policies are already operating.

What is a carbon dividend?

As proposed by the CLC, a carbon dividend has two main parts. First, government puts a gradually rising “price” on carbon emissions from fossil fuels that contribute to changing the climate, sufficient to stabilize emissions at a safe level. In the case of the CLC, this price is a tax on all use of fossil fuels.

Second, government distributes the revenue from this tax equally to each citizen as a flat payment or “dividend” delivered quarterly.

Other versions of this idea put a price on carbon but dedicate the revenue to other public projects, such as investments in energy efficiency or zero carbon energy to reduce fossil fuel demand, creating a “double dividend.”

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How is this different from a carbon tax?

Most economists have concluded that taxing carbon gives industry and households a strong incentive to use less fossil-fuel-based energy. The carbon dividend puts the revenue from that tax directly to work for the public. Those who reduce their fossil-fuel use will pay less in carbon taxes — but will receive the same dividend, coming out ahead financially.

Does a carbon dividend require a carbon tax?

No. Working Assets founder Peter Barnes’s original proposal for a carbon dividend recommended auctioning emission “allowances” as part of a cap and trade policy, rather than a tax. Under this “cap and auction” design, government limits total carbon emissions and requires companies to buy one emission “allowance” for each ton of pollution they emit up to the overall limit. Selling these allowances to emitters brings in revenue that can be divvied up among all citizens.

Have carbon dividends been implemented before?

Yes. Many recent climate policies include variations on the carbon dividend. British Columbia, for example, imposed a carbon tax in 2008; it refunds the money to citizens by reducing other taxes. Other governments, including a number of U.S. states, have chosen a cap and auction design instead, dedicating auction revenue to tangible public benefits.

What’s an example?

The Regional Greenhouse Gas Initiative (RGGI) is a great example. Created by a coalition of Northeastern states in 2008, RGGI was the nation’s first cap and auction program. Instead of paying citizens in cash, these states use the income to subsidize residential energy efficiency improvements such as better insulation or higher efficiency appliances. This both reduces emissions and helps citizens lower their energy bills.

By 2013, more than 60 percent of the auction revenue had gone to helping install energy efficiency programs in more than 1.2 million households in the region, through everything from simple fixes such as programmable thermostats to no-interest loans for insulation and more efficient heating systems. An additional 15 percent of auction revenue helps low-income households pay their energy bills.

As a result, RGGI has returned 75 percent of that carbon revenue to residents, while reducing the region’s fossil fuel use and keeping vulnerable residents warm during the northern winter.

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Are other kinds of dividends possible?

Yes.  RGGI and states such as California also have used auction income to invest in new renewable-energy infrastructure and fund public programs that help low-income and minority communities cope with climate change, including improved low carbon affordable transportation and housing options.

Is a carbon dividend politically realistic?

Yes. Recent research suggests that the public and politicians support climate policies more when the revenue from carbon taxes or auctions goes to specific public benefits. Policies that don’t deliver tangible public benefits are less likely to succeed politically.

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Despite the successful experiences states have had with using carbon prices to protect citizens and fund more reductions in fossil-fuel use, the CLC is focused only on turning revenue into simple cash payments. That’s a missed opportunity. Recent experience tells us that considering a broader range of ways to help citizens reclaim the atmospheric commons could have more powerful results.

Leigh Raymond is professor of political science at Purdue University and the author of the “Reclaiming the Atmospheric Commons,” (MIT University Press, 2016).