NASA’s James Hansen, one of the most prominent (and alarmist) climate scientists, argues against cap-and-trade plans in today’s NYT. While I don’t quite agree with every point in his analysis, I agree with his bottom line. Cap-and-trade is unlikely to produce meaningful emission reductions, but will require the creation of a massive regulatory bureaucracy and provide a rent-seeking bonanza for special interests (something prominent defenders of cap-and-trade legislation used to recognize). In place of cap-and-trade, Hansen proposes an alternative: Fee-and-Dividend.
Under this approach, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production.
All of the collected fees would then be distributed to the public. Prudent people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on. Those who do better than average in choosing less-polluting goods would receive more in the dividend than they pay in added costs.
For example, when the fee reached $115 per ton of carbon dioxide it would add $1 per gallon to the price of gasoline and 5 to 6 cents per kilowatt-hour to the price of electricity. Given the amount of oil, gas and coal used in the United States in 2007, that carbon fee would yield about $600 billion per year. The resulting dividend for each adult American would be as much as $3,000 per year. As the fee rose, tipping points would be reached at which various carbon-free energies and carbon-saving technologies would become cheaper than fossil fuels plus their fees. As time goes on, fossil fuel use would collapse. . . .
In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world.
A Fee-and-Dividend approach would be more transparent, less vulnerable to special interest pleading, more conducive to investment in technological innovation (because it would avoid the price volatility produced by cap-and-trade), would be easier to implement within existing trade rules (and would not require a new international agreement for this purpose), and — if implemented as Hansen suggests — be less costly to most Americans.
Given that meaningful cap-and-trade legislation is unlikely to pass Congress — even the lard-heavy Wazman-Markey just squeaked through the House with 218 votes, and that was before ClimateGate — those interested in serious climate policy should consider this sort of alternative.
David Chesler says:
I am afraid the dividend would never reach the taxpayers. It wouldn’t even go to reducing the deficit the taxpayers’ grandchildren will inherit. It will be hijacked for some noble purpose, and give rise to more fights over pork.
December 7, 2009, 11:05 ambyomtov says:
I love it. A massive transfer of funds from suburban/exurban/rural dwellers to residents of high-density areas. Where do I sign?
December 7, 2009, 11:08 amDavidicus says:
Your proposed solution might be better–in the same sense that jailing “witches” for life might be better than burning them at the stake. There is no such thing as AGW–please stop pandering to these fascists…..
December 7, 2009, 11:10 amCalderon says:
Isn’t this just a carbon tax, except with (in theory) the revenues going to the people instead of the government?
December 7, 2009, 11:14 ampireader says:
Professor Adler –
The “fee” approach you’ve described would be easier to administer, and perhaps ‘fairer’. But it would load the costs of reducing greenhouse gas emissions quite heavily onto a few regions … especially the Midwesterners who use coal to generate electricity.
Of course, they — via their representatives in Congress and elsewhere — would fight that to the last ditch.
In contrast, a cap-and-trade program achieves the same GHG reductions, but spreads out the transition costs over the larger economy. That assuages the threatened regions, making GHG limits politically feasible.
You can call that “rent seeking”, but I’d call it a political compromise needed to get GHG reductions underway. And since the benefits of avoiding global warming are widely shared, it doesn’t seem untolerably unfair.
December 7, 2009, 11:29 amAndyM says:
That’s exactly what this is. And, if you believe the theory that the dividend will actually exist and not be hijacked by someone’s favorite pork project, that’s why it is superior to cap&trade — it provides a cost that matches the externality of creating CO2, but it does not give any opportunity for rent-seeking (except in how the dividend is distributed).
The point of cap&trade is that there is a cost to creating CO2 (because you have to buy the credits, or have the opportunity cost of not selling credits you already have). The downside is that someone has to allocate the caps to different industries, which is a massive hand-out to someone, leading to industries making large campaign contributions along with sob stories about their poor hard-working workers…
You could do the same thing with a different paint job by implementing Cap&Trade with the cap being “X amount per person, distributed to the people.”. Each person then can (and probably will) immediately take their cap and auction it off, gaining some cash (equivalent to the above dividend), and everyone burning fossil fuels will need to buy the credits, thus paying the “tax”.
You could also do the same thing with a government agency initially granted the entire cap, with a mandate to auction off all of it. The “dividend” accrued to this agency is flowing into the government general funds, where you can distribute it to the public (or collect less taxes from the public)…
While economists might say that these methods all end up pretty much the same (in all of them polluters pay an amount proportional to the carbon, and the revenues get laundered through the government to the people), the paint job you put on the plan matters a lot — some people will only buy red cars, and some people will only vote for government programs that have the word “trade” in the title.
December 7, 2009, 11:37 amMatt says:
Davidicus,
You are exactly right, this program has all the merits (and flaws) of a carbon tax or any other emissions fee program. I am not sure why this is being proposed as a novel policy innovation (assuming that is the argument) because it is not. Essentially it merely combines an existing policy proposal with a normative argument that individual citizens will more efficiently spend money than the government, and therefore, any fee program should be tied to a dividend. This argument certainly has some merit but is not terribly novel.
I suppose the lasting value of this proposal is not its policy value, but its political palpability, whereby instead of developing an burdensome and intrusive new regulatory market it allows for individual choice and limited government intervention. Or so the argument goes.
December 7, 2009, 11:39 amThorley Winston says:
Yes except also they’re calling it a “fee” instead of a “tax,” which is what it really is, in order to try to make it an easier sell politically.
December 7, 2009, 11:41 amDavid Schwartz says:
What a great way to push goods production overseas, where energy costs would be lower. Or are you going to try to tax every imported good based on how much carbon was emitted in its production? And have we now decided that sequestering the carbon has zero value?
Heck, why not tax every import a flat 10% tax and share that equally among all Americans? It doesn’t get more progressive than that.
December 7, 2009, 11:49 amMatt says:
meant to reply to calderon
December 7, 2009, 11:55 amMr L says:
So basically he wants to set up an Energy Tax which exempts foreign-made goods, hides costs from consumers, and creates obvious perverse incentives. Great.
Can you see the logic here? Carbon reductions are ‘rewarded’ with a decrease in your ‘dividend’, as opposed to cap & trade which grants an emissions credit (i.e. cash).
December 7, 2009, 12:00 pmOren says:
Can you please explain to me the detailed distinction between a fee and a tax?
December 7, 2009, 12:02 pmDavid Schwartz says:
A “fee” is supposed to cover the costs associated with the thing that causes the fee to be due. Whereas a “tax” exceeds any costs associated with the thing that causes the tax to be due and provides revenue for other purposes.
December 7, 2009, 12:10 pmCato The Elder says:
There is approximately a 0.0001% chance that the federal government would ever allow any such levy to pass through direclty one-to-one onto its intended recipients. That mitgates the most important advantage of Hansen’s plan. Organized politicians, ideologues, and lobbyists could not possibly bear to see such an inviting pot go unsullied to forego their pet political projects. No middlemen means no quid pro quos, so there’s little chance our lawmakers would abide it.
For example, economists have largely been of the belief that direct cash transfers are the most welfare-enhancing progams for ages, yet we still observe the US burdened with agricultural policy from the Depression-era with regard to food stamps. As soon as money enters the custody of a political body, you can bet significant political constituencies will form, eager to disburse it for “enhanced”, putative benefits — per their slight (and implacable) fees, of course.
The policy language will shift, too. Though even liberal lion FDR urged that Social Security be sold to citenzry as a pension program, and not a welfare one, some people now want to change the crucially worded “defined contribution” into something like a “pure tax”, to preserve benefit levels they are wedded to. Don’t imagine they won’t employ the same rhetorical sleight-of-hand here as well.
And don’t forget, there’ll be a religious component to that future upcoming debate: You will see leftist enviornmental organizations arguing that the money could be better used for funds to help developing countries cope, to prevent deforestation of the Amazon, or even for research monies to combat AIDS and malaria in Africa — in short, whatever they can connect, tendentiously or not, to global warming. Except now, their audience in this case will be those not nearly given to be as credulous as those who directly labored for their money. And what of he who foregos first-class charter flights (a la Gore) for instead a serviceable luxury towncar with his dividend? For shame, too many will cry, for any boy to spend the Lord’s tithe on candy and comic books!
December 7, 2009, 12:14 pmThorley Winston says:
That’s part of it, but I think that the key component is that a “fee” is charged for the voluntary use of a particular good or service provided by the party charging for it. Taxes do not have that direct relation either because either (a) they’re not tied directly to pay for a particular good or service used by the payor or (b) the party charging it, isn’t the one actually providing that good or service.
December 7, 2009, 12:21 pmOren says:
It costs my State approximately $1 (rounding up a lot) to print out a new registration card for my automobile and update their database. Printing a new driver’s license might be (again, rounding way up) $5 due to the fancy hologram and barcode on it.
December 7, 2009, 12:25 pmMikey says:
Well, you’ve just explained why we’ll never see it.
December 7, 2009, 12:26 pmThales says:
Davidicus: Yes, a policy that is enacted by a democratically elected representative body and signed by a democratically elected chief executive, which pushes the costs of harmful activity onto those (both businesses and consumers) who currently engage in it at the expense of everyone else–what could be more fascist?
Since your labels bear the mark of the absurd and seem to reflect magical thinking writ into political ideology (i.e. no taxation or regulation of pollutants is what I want and think is the natural order of things, therefore any science and policy that challenges that position must be unsound), perhaps it is your remarks that ought to bear comparisons to burning witches.
December 7, 2009, 12:31 pmDerHahn says:
Oren, thanks for providing the examples of how the word ‘fee’ is used when the more appropriate term would be ‘tax’.
December 7, 2009, 12:37 pmRichard Nieporent says:
Clearly James Hanson is the 21st century Renaissance man. He is the preeminent climate scientist (Who needs correct data when you have truth on your side!), lawmaker (The climate skeptics should be tried for crimes against humanity), economist (Let’s institute a fee and dividend so we can bankrupt the nation) and comic (All of the collected fees would be distributed to the public). Is there no end to his talents?
December 7, 2009, 12:45 pmPeteP says:
“The resulting dividend for each adult American would be as much as $3,000 per year.”
So, he wants the government to collect another 450 BILLION dollars a year, and then ‘redistribute it to the people’.
Can you even IMAGINE the politicians getting their hands on another 450 billion dollars of ‘revenue source’ and not SPENDING IT on whatever they want to spend money on ???
Come on …….
December 7, 2009, 12:49 pmJohnF says:
Why do you call this “serious climate policy”?
I think that statement carries a lot of baggage. A better way to put it might be that this idea is worth considering if one is “serious” about reducing CO2.
December 7, 2009, 12:49 pmSigivald says:
I think the best “serious climate policy” is no action, at this point.
A “serious” policy requires having a serious idea of what’s actually going on – and at this point it’s unreasonable to take such actions on the economy based on increasingly sketchy assumptions about the effects of CO2 emissions … especially when the rest of the world (this means you, China and India) is not going to join in.
Huge costs, no actual (beneficial) effects*, bad idea.
(* Well, except for politicians who get to Be Seen To Be Doing Something, and for the State’s coffers…)
December 7, 2009, 12:51 pmDavid Chesler says:
Running with the silly concept, imported goods may be considered to contain the carbon that was converted into CO2 in the manufacturing of the good, and taxed (tariffed, feed) appropriately. Have to include the amortized fixed costs of for instance building the factory. And the workers who are heating their homes with wood or peat or dung fires.
December 7, 2009, 12:59 pmMark N. says:
That’s what I took it as— maybe shorthand for “this is a policy that serious people might reasonably conclude would actually reduce CO2 emissions (unlike cap-and-trade, which will not)”.
December 7, 2009, 1:08 pmSammy Finkelman says:
December 7, 2009, 1:08 pmSammy Finkelman says:
Sorry – that’s only the quote and withouyt it being cut down.
My comment is:
You’re asking the people who support massive controls on carbon dioxide emissions to use logic???
This is only one of half a dozen errors they are making.
Of course it would make much more sense to put controls on at the wholesale or extraction level rather than the consumer level..
But there is no way to distinguish any tax rebate from any other tax cut.
As for eliminating rent seeking – taht would make it much more difficult to pass Congress.
And also -
December 7, 2009, 1:12 pmThe Volokh Conspiracy » Blog Archive » Here Come the Greenhouse Regs says:
[...] proposed in Congress are one option. A revenue-neutral carbon tax, such as that proposed by James Hansen or Rep. Bob Inglis and Arthur Laffer, would be another. But the bottom line is that unless [...]
December 7, 2009, 1:18 pmgasman says:
And even if there were AGW, so what.
December 7, 2009, 2:20 pmIn the end, all available carbon will be oxidized. We might slow down the rate of consumption of carbon (mainly oil and coal), but nowhere is there the plan to keep it in the ground in perpetuity. Whether it all comes out of the ground and is placed into the atmosphere over the next 100 years, or next 150 years probably matters little. We will soon find ourselves bumping up against finite production capacity (for oil anyways) and its contribution to co2 will begin to drop.
Do nothing and in 50 years much more of our energy will be non-carbon based. Do massive amounts of social re-engineering, and a similar amount of our energy will be non-carbon based, but governments of the worlds will be all the stronger for it.
Oren says:
“More appropriate” in this case being a synonym for “at variance with how 99% of the population is likely to understand the term”. After all, the purpose of language cannot be to express ideas in a fashion that the recipient will understand. No, that just won’t do.
[ PS. If you want less snip, responding in earnest to a sarcastic comment might not be the best choice. ]
December 7, 2009, 2:32 pmVader says:
If the idea is that consumers aren’t seeing the external costs of carbon fuel use, and this is supposed to shift those costs onto them, then shouldn’t the fees be used to fund carbon mitigation?
December 7, 2009, 3:08 pmLior says:
I wonder who will decide the “carbon equivalence” value of myriad other gasses. I’m sure that the farm lobby and beef importers will be excited to pay a recurring “fee” per head of cattle, for example, to cover their methane emissions.
December 7, 2009, 3:39 pmThe Awful Truth says:
I’d prefer a carbon tax to the cap and trade nonsense. Ditch the pretence of a fee and rebate, and just a tax a tax.
Taxes will inevitably go up to pay down the deficit. I only hope there are substantial spending cuts to accompany them. I see no reason not to adopt a carbon tax instead of an income tax hike or imposition of a VAT.
December 7, 2009, 5:10 pmOren says:
After this, I think rural & urban areas will be about revenue-neutral with respect to one another. As it is, us rubes of city folks keep voting for a big Federal government that spends $.70 in our State for every $1 it collects.
December 7, 2009, 10:54 pmEli Rabett says:
There is a straightforward way of dealing with moving production overseas to avoid a carbon whatever
December 8, 2009, 12:05 amDavid Schwartz says:
Eli: While you could do that, it destroys much of the appeal — the whole point was that this was supposed to be simple and easy to administer fairly.
December 8, 2009, 6:19 pmCOLLIER,DAVID says:
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December 18, 2009, 3:05 pmHARDEE,DAVID says:
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December 18, 2009, 3:05 pmThe Volokh Conspiracy » Blog Archive » “Cap-and-Trade Is Dead” — Long Live Cap-and-Trade? says:
[...] a revenue-neutral carbon tax, such as those proposed by Rep. Bob Inglis (R-SC) and Arthur Laffer or NASA’s James Hansen are better still. Such proposals would be more efficient, more transparent, and easier to [...]
March 2, 2010, 9:03 pm