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Saving the world with economics

  • Published at 10:53 pm August 25th, 2019
Climate change

How to solve climate breakdown with carbon taxes and dividends

Every day, the news brings fresh stories about the urgency of stopping climate breakdown. The number of record hot years over the past decade keeps climbing, along with reports of severe storms, summer heat waves, and melting polar ice. 

And yet we continue burning coal, oil, and gas every day, generating more carbon dioxide emissions and making the planet hotter. Sometimes the scale of the climate problem seems overwhelming. But the fact remains that stopping global warming is simple; it only requires implementing a policy of global carbon taxes. 

Economists have acknowledged for decades that global warming is essentially a failure of the market to price fossil fuels correctly.

The abundance of coal, oil, and gas means their minimum price is largely determined by extraction costs from the earth, which generally results in a low price (particularly for coal, which is cheap to mine). Unfortunately, the low prices of fossil fuels don’t reflect their true cost to society: If global warming is allowed to raise the Earth’s temperature by 4 or 5 degrees Celsius over the next century as projected by scientists, it could mean the end of much of the world’s population through droughts, crop failure, famines, and ultimately warfare over food and water (a pattern already seen in Syria).

The long-term cost of unmitigated climate change would be almost incalculable.

The rational, economic solution is to tax fossil fuels at the point of extraction or import by coal, oil, and gas companies. This would increase prices of coal, oil, and gas and reduce their use, and thus slow down carbon emissions and global warming.

However, governments have been wary of carbon taxes as a political liability which could create both unemployment and public dissatisfaction. In France, Macron’s attempt to impose a carbon tax at the beginning of 2019 sparked the violent “yellow vest” protests among low-paid workers who could not afford higher transport and heating bills.

However, there is a refinement of carbon tax policy which can solve the problem of imposing any tax burden on the poor, namely “carbon dividends.” This is the subject of economist James Boyce’s excellent new book The Case for Carbon Dividends. A carbon dividend simply returns carbon tax revenue to the public as a flat payment per tax-payer. If all carbon tax revenue is returned this way, the net economic burden of the carbon tax will be zero, and it will not create unemployment.

Consider a simplified population of 100 people consisting of five wealthy people and 95 lower-income people. As wealthy people buy more carbon-intensive goods like cars and airplane flights, the wealthiest 5% may have 100 times the carbon footprint and thus might each pay $1,000 carbon tax (as opposed to $10 for a lower-income person who doesn’t fly or drive).

Total carbon tax revenue for a sample population of 100 people would be (five wealthy people x $1,000 per person carbon tax) + (95 lower-income people x $10 per person carbon tax) = $5,950. 

However, all tax-payers would receive an averaged equal carbon dividend of $5950/100 or $59.50 each.

That means that the wealthiest 5% of people would pay a net tax of ($1,000 carbon tax - $59.50 carbon dividend) $940.50 each, which gives them a powerful incentive to reduce their fossil fuel consumption.

On the other hand, the lower-income 95% would receive a net benefit of ($59.50 carbon dividend - $10 carbon tax) $49.50. This net benefit will help low-income people pay for higher costs of fossil fuels (due to carbon taxes) without falling further into poverty, and thus help prevent political backlash against the carbon tax. Even though it doesn’t cause any net tax burden, the carbon tax will make all use of fossil fuels more expensive and speed up the transition to renewable energy. The higher the carbon tax, the faster the transition will be.

This carbon dividend policy was not invented by Boyce; he has just written the first book devoted to it. In fact, carbon dividends are the policy advocated by Citizens’ Climate Lobby (www.citizensclimatelobby.org), a worldwide group of volunteers dedicated to educating the public and politicians about how to stop climate breakdown by implementing carbon taxes and dividends.

The imposition of a carbon tax and dividend policy in Canada at the beginning of 2019 was largely the outcome of years lobbying by this group. This initial success in Canada needs to be replicated in every country if climate breakdown is to be prevented.

Since Bangladesh is one of the countries most vulnerable to climate change, and there is now a large expatriate Bangladeshi population around the globe, one hopes that Bangladeshis, wherever they are, will join the campaign to stop global warming through carbon taxes and dividends. 

Zeeshan Hasan is a director of Kazi Media, the company behind Deepto TV. He is also the managing director of Sysnova.

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