When is a tax not a tax? When it’s a carbon dividend

Oil extraction

(reading time: 8 mins)

Scientists and economists have long advocated carbon taxes as the most effective way to remove carbon from the world economy. The carbon dividend is one of the few ways to make carbon taxes politically acceptable.

But while taxing carbon may be vital, people rarely vote for new taxes. While left of centre Europeans like me want increased funding for public services, history shows it’s an uphill task selling voters the tax increases needed to pay for them. It’s too easy for voters and politicians to think short-term and let future generations pay, with the cost of inaction rising all the time.

However the strength of the carbon dividend may be its cross party appeal. In different forms, the carbon dividend has long been popular with environmentalists (it is UK Green party policy), but is also gaining traction with Republicans and Libertarians. See recent documents The Future of Carbon Pricing from centre right UK think tank Policy Exchange, and the Republican leaning Climate Leadership Council’s The Conservative Case for Carbon Dividends1

Here is a brief summary of how carbon dividends would work, and some key issues that stood out for me.

What is a carbon dividend?

Carbon would be taxed to discourage emissions, but governments would not keep the revenue for general expenditure, or even programs to counter climate change. Instead the carbon tax revenue is distributed as a quarterly or monthly dividend between all citizens. Every adult would receive the same amount, which would offset the inevitable rise in living costs created by a new tax.

I believe for this to gain and keep cross party support it’s vital that every Pound, Euro or Dollar collected in carbon tax goes back to the pockets of every citizen. The revenue must be ringfenced and separate from other taxes. If not carbon taxes will be attacked by right wing media as the establishment building ‘big government’ by stealth. Creating carbon taxes that the government does not gain from – call them neutral taxes, or no-gain or no-take taxes – should make them harder for the fossil fuel lobby to attack.

Who benefits?

The majority of us should be better off. A 2011 study by the Rowntree foundation found the wealthiest 10% are responsible for two and a half times as much carbon as the poorest 10% in society2.

So although goods prices will rise until renewables become the norm in our economy, the wealthiest will be paying more in carbon tax than they gain from the dividend. Whereas the majority of us will gain more from the dividend than we lose with increased prices. And by making lower carbon choices everyone has scope to further reduce living costs, while keeping the dividend of course.

There are some cases where the poorest could be worse off – someone on a low wage living alone in the country who drives to work and has an energy inefficient home for example. These cases will be rare but certainly will exist. So people on already low incomes who might suffer must be identified in advance and given additional help so they are no worse off. One proposal is to allow people to use future dividend payments to pay for energy efficiency measures, which then reduce living costs.

The key point is because the rich are responsible for more greenhouse gas emissions, they will pay in more. The carbon dividend is a mild form of income redistribution because everybody qualifies for the same payment, and this mild redistribution of wealth through a ‘polluter pays’ principle is a key factor for the left. It may even be a (very) small step towards a universal basic income (UBI).

At what rate would carbon be taxed?

The Conservative case for Carbon Dividends suggests a starting price on carbon of $40 per ton. This would steadily increase year on year, the price being set independently of governments to meet climate targets. This is higher than the current market price of the EU CTS, which has only just reached €20 per ton.

At $40 per ton the dividend paid out is likely to be a few hundred dollars/pounds per person per year3.

What happens at the border?

Imported goods are an issue for any carbon tax. For example, although the EU has made some progress with energy efficiency and getting renewables onto the grid, Europeans have for years been effectively offshoring increased emissions to developing nations like China, because the Chinese grid used by manufacturers has a high proportion of coal generation.

Nations trading with a carbon dividend nation have a reason to adopt compatible carbon tax and dividend schemes. If they don’t, imported goods would have carbon taxes applied based on the average emissions of that nation’s grid. This would push up the prices of imports, but again as with domestic carbon tax revenue, the revenue is ringfenced, goes back to the citizens and offsets the price increases of imports.

So the carbon tax and dividend appears to be a simple solution that should attract support across the board. But there are always potential risks in relying on a market solution to fix what in many ways is a basic failure of human nature to take responsibility for the long term.

No carve-outs or exceptions

Politicians and the public must resist industries pushing for exemptions. Take aviation for example.

Electric cars and buses are viable now, but electric or hydrogen airliners are technically difficult and a long way off. As carbon taxes increase, the cost of flying will likely rise at a faster rate than other purchases. Of course for most of us the dividend increases our ability to pay for airline tickets, so only those who fly frequently will lose out.

However it is possible to make synthetic fuels by sucking hydrocarbons from the air, producing carbon neutral air fuel (so exempt from carbon tax) for existing aircraft at a cost of 25% above standard fuel costs4. But as standard air fuel prices rise with carbon taxes, we will reach a point where the synthetic carbon neutral fuel is cheaper. From then the synthetic fuel would likely continue reducing in cost due to economies of scale. This could also have a knock-on effect for other fuels, giving us cheap carbon neutral petrol in applications where petrol is more difficult to replace.

So it’s vitally important the politicians do not surrender to lobbyists and special interests. That would prevent the decarbonisation of aviation and hamstring the development of cleaner technologies like synthetic fuels. The true cost of carbon must always be paid.

Could it trigger a fossil fuel price war?

In neither of the two proposals have I seen a discussion on potential risks of a fossil fuel price war.

Unlike most industries, oil producers can to an extent control price simply by varying their output.

If oil producers are not on board with carbon taxes and dividends, might they increase production for a few years to keep down the price of a barrel of oil, thus negating the carbon tax and preventing wider adoption of renewables, and perhaps even increase fossil fuel use? Unlike most industries, oil producers can to an extent control price simply by varying their output. Could a sudden ‘dash for cash’ – producers taking profits while the world is still dependent on oil – throw a spanner in the works?

Would a carbon tax and dividend not then require some sort of lowest price set for crude oil, as well as setting a price for emitting carbon? If so this would no longer be the entirely free-market mechanism the Libertarian right want it to be. Or equally possible, what if oil producers slash production to drive the oil price up rapidly, in an attempt to force politicians to abandon the tax?

I wonder if the influence oil producers still have in a world dependent on oil has been properly considered.

Scrap environmental regulations?

The Libertarian right want a reduction of carbon limiting regulations to go with a carbon dividend, on the basis that such regulations become redundant. This means relying on a market solution to rapidly repair a problem that was created by market forces. Given there is little room for failure, perhaps the dividend should run for a few years and prove it can deliver, before attempting wholesale removal of existing carbon regulation?

Additionally a carbon dividend must not be used as a bargaining chip for industry to demand other environmental rules get scrapped. Returning to the point above, one reason newer and dirty fossil like shale gas and tar-pit oil have lower profit margins is surely because of the regulations that protect clean land and water. Without these regulations, operating costs come down and more fossil fuels may get extracted and burned, defeating the purpose of the carbon dividend.

Conclusion: Why even climate skeptics might support a carbon dividend

For those convinced the scientists have it all wrong, or that climate change is a left-wing hoax, a carbon tax and dividend is still something to support.

Remember a thing called Peak Oil which was all over the media a few years ago? Attention may have shifted, but the fact is there is only a finite amount of fossil fuel available, and the easily extracted fuel has mostly been used up. What remains, be it from Canadian tar sands or a National park somewhere, is increasingly difficult and expensive to extract without trashing the clean land and water that remains on this planet.

Surely it’s better to deal with our dependence on fossil fuels now and make a phased switch to renewables, rather than wait passively for the day fuel prices jump, giving an unwelcome shock to a world economy unable to function without cheap fossil fuels?

A renewable energy economy can give a quality of life equal or better than what we have now. After more than a century of development fossil fuels have reached the limit of what they can do for us, so it’s time for humanity to use something smarter. Electric cars are a good example. An electric car has about 100 moving parts, a standard combustion engine vehicle several thousand parts, which generate friction and waste energy. Even according to the US government, existing electric cars convert more than half their energy into motion, whereas for a combustion engine 21% is considered a good return.5

This is the advantage of renewable energy. Not only are renewables cleaner, they are already more efficient. And who is going to argue that increased efficiency is bad for our economy?

So even with all the issues and caveats I’ve described above, a carbon dividend is I believe the most likely way to get carbon taxes enacted, because carbon taxes must overcome deeply embedded climate skepticism in the political right to have any chance of implementation. If done properly and soon, a carbon tax and dividend may reduce carbon emissions for decades to come.


1. PDF’s of UK Policy Exchange The future of Carbon Pricing and US Climate Leadership Council The Conservative Case for Carbon Dividends ..return to text..

2. In a 2013 study the highest income households’ carbon footprint was 14 tonnes, for the lowest income households it was 5.5 tonnes. Rowntree foundation study ..return to text..

3. The Conservative Case for Carbon Dividends says “a family of four would receive approximately $2,000 in carbon dividend payments in the first year.” so I’ve approximated this to a few hundred pounds per person. ..return to text..

4. Canadian company Carbon Engineering estimate a 25% difference for production of synthetic diesel. I’m assuming synthetic air fuel would have a similar price differential to conventional air fuel. ..return to text..

5. Efficiency of electric and internal combustion engines compared in this US government document. ..return to text..