Carbon taxes are a much discussed mechanism for using market mechanisms to incentivise a transition to a zero-carbon energy from fossil fuels, exploiting the innovation and flexibility that markets can provide.

However, detractors cite potential economic harm to those on low and middle incomes as a reason to avoid such action. Many such detractors turn out to be straight-up fossil fuel shills with no care whatsoever for the poor but who will use any arguments that come to hand to deflect policy makers from adopting a robust carbon tax.

Carbon Fee and Dividend policy directly answers any such concerns, real or disingenuous, by turning carbon taxation into a progressive policy that actually redistributes wealth from the richest 20% to the poorest 40% while leaving the middle classes broadly unaffected.

Carbon taxes win Nobel Prizes

Carbon taxes have been found to be a highly effective and efficient way of driving the economy to adopt alternatives to fossil fuel energy. Notably, William Nordhaus of Yale University was been jointly awarded the 2018 Nobel Prize in Economic Sciences with Paul Romer for ‘integrating climate change into long-run macroeconomic analysis’.

Nordhaus has proved prescient on the progress of CO2 emissions, writing in 1974, :

I have performed a rough calculation of the atmospheric concentration of carbon dioxide… Assuming that 10% of the atmospheric carbon dioxide is absorbed annually (G. Skirrow), the concentration would be expected to rise from 340 ppm [parts per million] in 1970 to 487 ppm in 2030 – a 43% increase. Although this is below the fateful doubling of carbon dioxide concentration, it may well be too close for comfort.

It turns out we are right on track to hit 487 ppm of carbon dioxide in 2030. In two papers (Nordhaus 1975, 1977), he laid the groundwork for what is now an entire field on the economics of climate change.

Now, there is certainly valid criticism to be made at where Nordhaus and others would set carbon taxes to maximise global growth. Many believe that there is insufficient weight given to factors such as warming feedback and the fate of the poor global south and these are certainly issues of concern. Such concerns would lead to carbon taxes well above the $30/tCO2 that Nordhaus originally proposed. However, there is no doubt that Nordhaus has established carbon taxes as a powerful tool in how we re-shape the economy to prevent climate change.

Clutching at straws and crocodile tears

Of the various stages of climate change denial and resistance to action, one of the later symptoms is an unconvincing concern among opponents that imposing a carbon tax will hurt the poor.

Such attacks coincidentally always seem to come from politicians and lobbying groups closely aligned with the fossil fuel industry and with a long history of denying the existence or risk of climate change in the first place. Such people rarely have a track record of championing high taxes or corporate regulation or social policy that could benefit the poor in other contexts so their concern here is somewhat uncharacteristic.

But if we were to take their challenge seriously, do they have a point? Are carbon taxes bound to condemn the poor to further hardship?

Well, unsurprisingly, it turns out the answer is no.

Carbon Fee and Dividend is a progressive, redistributive policy

The Carbon Fee and Dividend policy has 3 central features:

  1. Tax carbon on fossil fuels as they are sold into the economy
  2. Implement a border adjustment tax system to impose tariffs on imported goods that didn’t bear comparable carbon pricing
  3. Pay the revenues back to citizens as a flat per-head dividend

Imposing a carbon fee and border adjustment tax does raise prices, especially for fossil fuel energy. According to a review of the policy (as proposed by CCL) by Wharton School Public Policy initiative:

For the first year that a $15 per metric ton of CO2 carbon tax is implemented, the cost of gasoline would go up by 16 cents per gallon, natural gas by 19 cents per therm (a 7.4 percent increase), and electricity by 0.6 to 1.1 cents per kilowatt-hour (kWh), depending on whether its source is coal or natural gas.

Seeing the whole picture

So looking at this effect alone, you could be forgiven for imagining the poor suffering further under such a policy. But that’s before you apply a dividend. This is the secret sauce that turns the entire picture around, to the point that the poor become the main beneficiaries of the policy.

According to a comprehensive study carried out by the International Institute for Applied Systems Analysis to model the effects of a carbon fee and dividend policy:

Given these assumptions, the policy confers a net financial benefit on 54% of households nationwide (59% of individuals). The distributional effects are highly progressive. Ninety percent of households living below the Federal Poverty Level are benefited by the policy. The average net benefit in this group is $342 per household, equivalent to nearly 3% of pre-tax income. Overall, the primary distributional effect is to shift purchasing power from the top quintile to the bottom two quintiles of the income distribution

This picture perhaps provides more instruction as to the motivation of rich, conservative fossil fuel lobbyists that oppose such a policy. Using the plight of the poor is nothing more that a disingenuous tactic designed to smear a progressive policy. For all those engaged in an honest debate, the facts are clear.

Only the top 20% by income (those best placed to deal with it) experience a significant net cost from the Carbon Fee and Dividend, leaving the middle class broadly unaffected, while those on low incomes are net beneficiaries.

A Carbon Fee and Dividend is therefore highly effective at mitigating entrenched inequality in society and gives the large majority of citizens a valuable stake in a fossil-fuel free future.

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