Carbon Dividends and the Green New Deal

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Keith Srakocic/AP Photo

The Bruce Mansfield power plant, left, in Shippingport, Pennsylvania

Proponents of a Green New Deal often are silent or ambivalent on the policy most widely recommended by economists: a price on carbon emissions to spur greater investment in renewables and energy efficiency.

One reason for reticence is the fact that carbon pricing on its own would impose real financial hardships on low-income and middle-class consumers, especially if the price were steep enough to make a difference in deterring use of carbon fuels. This seems to run counter to the goal of building an economy that works for working people.

What’s more, a carbon price might spark a public backlash like the “yellow vest” movement that has roiled France since the Macron government announced an increase in fuel taxes last November. “Macron worries about the end of the world,” explained one protester. “We worry about the end of the month.” Many American households share the same worry, and for good reason.

There is a way, however, to make carbon pricing a good fit with the Green New Deal: Return the money to the people as equal dividends for all. Economically, carbon dividends would reduce inequality, and at the same time provide everyone with an incentive to reduce their own carbon footprint. Politically, they would help to win broad and durable public support for a robust climate policy. Ethically, they would give concrete expression to the principle that the gifts of nature—in this case, the atmosphere’s limited capacity to absorb carbon safely—belong to each person in common and equal measure.

The Green New Deal will not be limited to a single policy or a single piece of legislation. Like its namesake of the 1930s, it will comprise a set of programs that together advance the goal of building a greener and more inclusive economy. The proponents of Social Security did not discount the need for the Civilian Conservation Corps or the National Labor Relations Board. In the same way, today’s proponents of strong environmental regulations, public investments in clean energy, and robust carbon pricing should see each other as allies, not rivals.

The Climate Policy Litmus Test

The litmus test for effective climate policy is whether it keeps enough fossil fuel in the ground to prevent global temperatures from rising more than 1.5 to 2 degrees Celsius above their pre-industrial level. Many policies can contribute to this, but the only way to be absolutely certain that we achieve it is to put a hard ceiling on the amount of fossil carbon we allow to enter our economy and then ratchet it down steadily over time.

The most straightforward way to do this is to issue carbon permits up to the level set by the ceiling. If the target is to cut emissions by 85 percent in 30 years, for example, this means cutting emissions by 6 percent each year. At every tanker port, pipeline terminal, and coal mine head, fossil fuel corporations would be required to surrender one permit for each ton of carbon they bring into the economy. When these permits are auctioned—as now happens quarterly under the Regional Greenhouse Gas Initiative for power plants in the Northeastern states—firms will bid what they expect to recoup from higher prices paid by consumers. The carbon price is the result of this limit on supply.

How high the price will go cannot be known in advance. It will depend on, among other things, how quickly and how far renewable-energy costs continue to fall and on how much governments invest in alternative transportation. Extrapolating from past experience, however, we would expect a 6 percent per year reduction in the supply of fossil fuels to translate into roughly a 10 percent per year increase in their price. If so, the price of gasoline and other fossil fuels would double in about seven years and quadruple in fifteen.

If other Green New Deal policies dramatically lower consumer demand for fossil fuels, the price increase will be smaller. Indeed, if these other policies are so successful that they achieve the targeted emissions reduction on their own, the supply limit will be redundant and the permit price will fall to zero. Like fire insurance, in this case a carbon price would turn out to be unnecessary—but optimism is not a good reason to forgo insurance.

To guarantee that we meet the target, it is crucial that the Green New Deal include a hard trajectory for reducing emissions. Just setting a carbon price and hoping it will do the job isn’t enough: It must be anchored to the trajectory. Likewise, just investing in mass transit and hoping for the best, or passing fuel economy standards and hoping for the best, isn’t enough. We know these things will help, but we cannot know exactly how much.

Today, we’re past the stage where just hoping for the best is good enough. We need to make absolutely certain that we cut emissions decisively in the coming years. And we need to face up to the reality that comes with this objective: higher prices on fossil fuels.

The Carbon Dividend

The carbon dividend—returning revenue from carbon permit auctions or carbon taxes to the people—provides a way to mesh carbon pricing with the goal of building an economy that is more equitable as well as more sustainable.

Chart Data Source: NRDC

The idea can be illustrated with an analogy. Imagine that 1,000 people work in an office building whose parking lot has only 300 spaces. If everyone could park for free, the result would be chronic excess demand and congestion. To prevent this, a parking fee is charged that limits demand to fit the lot’s capacity. Every month, the proceeds from the fee are distributed in equal payments to everyone who works in the building. Those who take public transport or bicycle to work come out well ahead: They pay nothing and get their share of the revenue. Those who carpool to work more or less break even. And those who commute daily in a single-occupancy vehicle pay more into the revenue pot than they get back. Carbon dividends apply the same logic to parking fossil carbon in the atmosphere.

Everyone gets the same dividend, regardless of their own carbon footprint, so everyone has an incentive to reduce their use of fossil fuels. Those who fly often in airplanes, heat and cool bigger homes, and so on, will pay more in higher fuel prices than they receive in dividends. But the majority of households consume lower-than-average amounts of fossil fuels, because the average is pulled up by the outsize carbon footprints of the top 1 percent. As a result, they come out ahead in sheer pocketbook terms, without even counting the environmental benefits of reducing emissions.

A recent study that analyzed the net impact of carbon dividends in the U.S. with a price of $50 per ton of carbon dioxide found that average incomes in the poorest tenth of the population would go up by about 5 percent; in the richest tenth, they would go down by about 1 percent. Carbon dividends alone would not be enough to reverse the nation’s enormous income inequality, but they would be a step in the right direction.

Some revenue from carbon pricing could be used for public investment, too. Spending by local, state, and federal governments accounts for roughly one-quarter of fossil fuel use. Recycling a comparable fraction of the revenue to them would keep government whole. By earmarking a fair share of public investment for communities that have suffered disproportionate environmental harm from the fossil-fueled economy—from the polluted neighborhoods in urban areas to coal-country communities afflicted by mountaintop mining and leaking piles of coal ash—this, too, would advance the goal of building a more inclusive economy.

Beyond “Eat Your Broccoli”

Too often, climate change has been framed exclusively as a threat that requires the present generation to make sacrifices for the sake of future generations. The result is to give climate policy an “eat your broccoli” flavor: You need to swallow it even if you don’t like it. A key breakthrough of the Green New Deal is to reframe the clean-energy transition as something that will benefit working people here and now, too.

The clean-energy transition will create millions of new jobs here and now. It will bring us cleaner air and public-health improvements here and now. With carbon dividends in the policy mix, it will lift net incomes for the majority of people while trimming them for the top 1 percent with their outsize carbon footprints.

These here-and-now benefits can change the climate policy narrative. A Green New Deal can taste so good that even Americans who are still not sure about the long-term impacts of climate destabilization will welcome it.