James Hansen’s fee and dividend: our election year tax cut

Everybody except Nick Smith thinks the emissions trading scheme is dumb. Unhappy with mainstream climate change policy responses, environmentalists are looking elsewhere. Here’s a new idea, that we’ll hear more of in 2011: an election year idea, all about tax and cuts

When is a tax not a tax but a dividend, that cuts carbon, and boosts the economy?

Environmentalists are backing away from mainstream climate change ‘response’ measures. They’ve lost faith in the process and the policy; they no longer consider carbon trading, or the Copenhagen emissions reduction pledges, fit for purpose. Last month the IEA World Energy Outlook 2010 confirmed it, concluding that even in the unlikely event governments meet their pledges, the resulting emissions are likely to see at least 3.5 degrees warming, nearly double dangerous levels. Domestically, there’s pretty much universal agreement about the essential uselessness of the emissions trading scheme (ETS).

To remind you, the ETS calls itself a ‘cap and trade’ scheme. But there is no cap, on emissions. It’s intensity-based, so they may increase. There’s provision for the purchase by emitters of emissions units, with a cap on their price, and a ‘half obligation’ subsidy, and other big long-term subsidies for trade-exposed polluters. There’s no provision at all for our biggest polluter, agriculture. Early evidence suggests that, as a carbon pricing signal, it's erratic at best.

The ETS is not loved. Indications by Labour and the Greens (who passed the earlier version) suggest waning commitment to it. These are but straws in the wind, but enough to see what way it is blowing. Even Nick Smith agrees that, as a mitigation and indeed adaptation measure, it will do very little. The government’s explicit objective has been not to properly price carbon, for fear of what it would do to the economy.

In 2011, we will hear more about something different: James Hansen’s proposal (here, here, here and here) for ‘fee and dividend’.

'Fee and dividend' means that a fee is set and charged when greenhouse gas-emitting products are made domestically, or imported. The fee is returned to individual taxpayers in equal shares, in its entirety: this is the dividend part.

Under Labour’s version of the ETS, there was a household fund, for energy efficiency and conservation (the government would set aside and decide how to spend some of the income generated by the ETS, for green purposes). This has been deemed by the current government to be “no longer necessary” and repealed. Labour had also previously proposed a partial carbon tax (on fossil fuels, having abandoned the agricultural ‘fart tax’) that would have been exactly that: a tax collected and spent by the government.

‘Fee and dividend’ is something different. All of the money goes back to individuals to decide how to spend it.

(‘Tax cut’ was a cheap trick, to get you in election-year mode and get you reading. There is no tax. The ‘cut’ was the hoped-for resulting cut in carbon emissions.)

The government could, if it wanted, keep some of the money for funding carbon abatement (similar to the former household fund), or paying Kyoto liability. That would be just one among the policy design issues and options, but Hansen proposes full redistribution, which would be more popular.

In short:

  1. directly price, to everybody, CO2 emissions through the fee;
  2. raise the cost of emissions-based products, to cut consumption of them, and promote cheaper greener alternatives;
  3. stimulate the economy with the dividend; and
  4. reallocate the dividend progressively, in equal shares.

Why would you do this, rather than a straight carbon tax? A carbon tax is like GST: it hits the poorest hardest.

Hansen’s idea, you see, is not just a money-go-round. The PM, in more flippant times, may have had something to say about it. The redistribution -- redistribution in full in equal shares to everybody, but not necessarily to those who paid it -- would be one of its obstacles.

Those whose consumption is heavy would indirectly pay more than they receive; those who work hard to reduce their carbon footprint would be better off. Those more focused on, and able to reduce, their carbon footprint are perhaps more likely to be those on middle to upper incomes; but these will also consume more, probably. Business would pay the fee, but not get the dividend.

The expectation, therefore, would be that all individuals (as opposed to the “vast bulk”) are better off.

Hansen’s glancing comment on population and family size is another wrinkle: the proposal from him suggests that only the first two children in each family would be eligible, thus hitting larger families.

The ETS is our current domestic way to make polluters pay. Polluters do not want to pay at all: they would, presumably, be grumpy about paying twice. Hansen’s idea, if adopted, would make the ETS a bit pointless, as well as an irritant.

It offers a mechanism for carbon pricing that the ETS lacks. It is a progressive policy. It tries to maximise emissions reductions and minimise economic cost.

The ETS does none of these things, with the possible exception of the last -- except that the only costs it minimises really are those to polluters.

It’s also interesting to think about how Hansen's idea might be adapted for global use, as the tool for shifting funding from developed to developing countries.