Development of carbon pricing could benefit from a two hundred year old idea

Cap-and-dividend and tax-and dividend arrangements, where proceeds from carbon pricing are returned equally to all citizens, at least in part, are already in place in Switzerland, and under discussion elsewhere.  They could help gain support from a wider constituency to enhance carbon pricing. 

A stake for all in the atmosphere …

Over two hundred years ago the political philosopher and campaigner Thomas Paine wrote a pamphlet called Agrarian Justice.  It was an extraordinarily farsighted document (see notes at the end for relevant extracts).  He identified natural resources as the common property of humanity, with rights distinct from those of private property created by labour.  He thus distinguished between the value added to land by the work of proprietors and the common value of land, implicitly arising from its scarcity, which he linked to the idea of a ground rent.  He recommended that the natural property rights in the land that are owned by all citizens should be recovered for all, most conveniently in the form of a payment into a fund on inheritance of land.  He proposed redistributing this fund equally to all adults in the form of a payment when they turned twenty-one, and a universal old age pension.

Something very like this idea seems to offer a constructive way forward in the development ofcarbon pricing.  The atmosphere is common property to a greater extent even than land, because it is continually mixed and globally mobile.  It therefore, following Paine’s argument, belongs equally to all.  Anyone making use of that property by emitting greenhouse gases should pay for that right in the form of a payment (a carbon price) into a fund.  Again following Paine’s argument, the proceeds would then be distributed to all citizens equally, most likely as an annual payment.  Eventually this should be to all of the world’s people, but starting with one or more jurisdictions would establish the approach.  This is usually referred to as cap-and-dividend or tax-and-dividend, depending on the type of carbon pricing scheme – it can work well as part of either an emissions trading scheme or a carbon tax.

Such a mechanism is already in place in Switzerland, where part of the revenue from the Swiss carbon tax is returned to citizens.  In the USA bills for such schemes have been proposed at both Federal and State level, with current proposals introduced in the state legislature in Oregon (see notes at the end for details).

Has many advantages …

Such an arrangement has number of advantages.

It gives citizens a direct stake in higher revenue from higher carbon prices, which may help carbon prices reach levels sufficient both to reflect the cost of damage and to provide adequate incentives for the scale of investment required for the transition to a low carbon economy.  At present prices are too low to do either.  (There is an implicit assumption here that citizens benefit from tighter caps and higher prices – e.g. a 20% reduction in the cap is likely to raise prices by more than 20%.  There might come a point when revenue is increased by higher emissions as elasticities fall below one, but we seem a long way from that, and indeed that point may never be reached.)

It also give citizens a direct stake in wider coverage of carbon pricing, , which would be likely to increase the economic efficiency of abatement.

It automatically provides compensation to residential consumers for higher energy bills due to carbon pricing.  Poorer consumers who on the whole have lower energy consumption would see a larger net benefit, especially as revenue would be raised from non-domestic consumers.  There are some exceptions to this – people on low incomes but with a large heating load for example – but further protection for vulnerable households can still be provided.

It also funds a basic income or “citizen’s dividend” to all.  The payment would currently be rather small but not insignificant.  With price of $40/tonne and global average current greenhouse gas emissions of about 7.5 tCO2e per capita this would provide an income of up to $300 per year.  As emissions reduce the dividend might also reduce, but rising prices may more than offset this.

There is an argument made in the environmental economics literature that a lump-sum dispersal to citizens is suboptimal, because it is better to use funds to reduce other taxes and so reduce distortions.   There is little if any empirical support for this argument as far as I am aware.  But in any case the view that citizens own those property rights makes the limitation of the argument clear.  Not providing citizens with the proceeds from sale of allowances (or a tax on emissions) is in effect a 100% tax on everyone for that revenue.  This is indeed non-distortionary, but a fixed per-capita tax is not regarded by governments or their citizens as a good idea anywhere, for sound reasons.

Although there are other compelling calls on uses of funds  …

There are also powerful arguments for using revenue to adapt help and compensate those adversely affected by climate change.  However this has proved enormously difficult to achieve.  Cap and dividend can go some way towards providing benefits for all as carbon pricing continues to spread around the world, especially if emissions per capita gradually converge.  Indeed it provides a way of institutionalising benefits for all, which has until now proved unachievable.  Nevertheless further compensation and help with adaptation is likely to be needed for the poorest, and reducing impacts on future generations and on the biosphere will be a continuing challenge.

There are also good arguments for regarding the atmosphere to be as a joint, indivisible resource to be managed for the common benefit.  This goes further than Paine’s perspective in arguing for joint property rights, in part because of the different characteristics of individual land holdings and the global atmosphere.  The Pope’s recent encyclical on climate change adopts this type of perspective (see Section VI of the encyclical).  However, institutions for optimally managing common assets at the required global scale are weak or non-existent – if they were not the climate change problem would probably be well on the way to a solution by now.  Cap-and dividend falls short of an optimal approach, but nevertheless marks a practical step towards better management for all.

In advocating this approach I recognise that there are many other potential uses for revenue raised by carbon pricing, such as funding research and development of low carbon technologies.  Each has arguments in its favour, in many cases good ones, and a balance will need to be struck in practice between different uses of funds, with not all proceeds being paid as dividends directly to citizens.

And political obstacles remain …

Opposition in some quarters to the idea of a citizen’s dividend is likely to be strong.  National treasuries, for example, may resist the loss of control.  However the measure is fundamentally one that benefits everyone.  It will be a struggle to gain acceptance, but it is a struggle Thomas Paine would have relished.

Adam Whitmore – September 2015

Notes

Thomas Paine, Agrarian Justice (1797)

Paine includes the following passages.  He first distinguishes between natural and artificial property:

There are two kinds of property. Firstly, natural property, or that which comes to us from the Creator of the universe—such as the earth, air, water. Secondly, artificial or acquired property—the invention of men.  In the latter, equality is impossible; for to distribute it equally it would be necessary that all should have contributed in the same proportion, which can never be the case; and this being the case, every individual would hold on to his own property, as his right share. Equality of natural property is the subject of this little essay.  Every individual in the world is born therein with legitimate claims on a certain kind of property, or its equivalent.

He seeks to recover the value of this common property from the current owners into a fund.  This is conveniently done at the time of inheritance:

Every proprietor, therefore, of cultivated lands, owes to the community a ground-rent (for I know of no better term to express the idea) for the land which he holds; and it is from this ground-rent that the fund proposed in this plan is to issue.

He then suggests the fund should be distributed equally to all adults:

To create a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property: And also, the sum of ten pounds per annum, during life, to every person now living, of the age of fifty years, and to all others as they shall arrive at that age.

He emphasises that this is a matter of respecting rights, not a humanitarian initiative:

In advocating the case of the persons thus dispossessed [from their natural rights to land], it is a right, and not a charity, that I am pleading for. 

Proposed Cap and Dividend Bills

Van Hollen Cap and Dividend Bill was proposed in the US Congress in 2009.  It proposed a cap with auctioning of 100% of allowances and border adjustments to prevent US industry being at a competitive disadvantage.  All auction proceeds would be returned in the form of a dividend to every lawful resident of the United States with a valid Social Security number.

More recently two bills have been proposed in the Orgeon House of Representatives.  HB3176 would charge fossil fuel sellers a fee (starting at $30/ton) for each ton of pollution.  All the money would go into a Trust Fund. Each September, the Department of Revenue would pay every Oregon taxpayer and taxpayer dependent a check for an equal share of the money.   HB3250, instead of creating a set fee, it would auction a capped number of allowances.

Revenue

54 billion tonnes p.a. of total GHG emissions (source: EDGAR), over 7.2 billion people is 7.5 tonne per capita.  $40/tonne is an illustrative figure close to the US EPA estimate of the Social Cost of Carbon.

Property rights

The subject of who, if anyone, owns the atmosphere is far too large a subject to go into here.  I will note simply that Paine’s view seems to have far more force that the notion due to Locke that permanent ownership of land is conferred by labour on that land, and in any case Locke’s proviso that common property can be owned provided  “… there is enough, and as good, left in common for others” clearly does not hold in the case of climate change.  The attempts of modern libertarian philosophers to deal with this issue, as for example Nozick does by denying that a free market system will actually run foul of the proviso, seem to me to be wholly inadequate.  None of which should imply I entirely agree with Paine’s characterisation of property rights either.

3 thoughts on “Development of carbon pricing could benefit from a two hundred year old idea

  1. Pingback: Uses of revenues from carbon pricing | On Climate Change Policy

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