There are many ways of designing a wealth fund based on revenues from carbon pricing. Debate about these is necessary, but should not distract from the merits of the broader proposal.
Last month I outlined the value of the carbon emissions, and the possibility of establishing a wealth fund based on revenue from carbon pricing. This post provides some brief responses to questions that have been raised in response to this proposal. There are many good design options to choose from.
Would the fund necessarily be national?
No. There are many national wealth funds in operation, and national carbon wealth fund may well be a pragmatic way forward in many cases. However, the Alaskan wealth fund is an example of a state based scheme, and others would be possible. In the EU a fund could also be established either at EU or Member State level. An international fund would be difficult and perhaps impossible to establish, but would appropriately reflect global nature of the climate change problem.
How would such a fund be governed?
There are many options here. The most important criterion is that governance should benefit the ultimate owners of the asset, namely citizens, rather than the state or special interest groups. This implies some independence from government. Other criteria such as transparency and ethically sound investment will also be important. Some have advocated a fully independent trust fund. However in practice some degree of government oversight is likely to be required.
How would this global public good be allocated internationally?
The distribution between nations of access to the atmosphere has proved a major point of contention in global negotiations on limiting climate change, and this situation appears unlikely to change. However existing carbon pricing regimes – or simply emitting free of charge – already use up a global public good. Giving citizens and governments a greater stake in increased carbon prices is likely to decrease the quantity of emissions, and so the proportion of the global commons used. This makes the approach I have proposed more compatible with good stewardship of the global commons than existing arrangements, at least for the next 50 years until revenues start to decline.
What would the macro-economic effects be?
These effects would probably not be large, at least for a national UK fund. The payment into a UK fund would be at most around £16 billion p.a. assuming much greater coverage and higher carbon prices than at present, a little under 1% of GDP per annum. Even this would be unlikely to cause major economic dislocation, especially if phased in over a few years. The fund would grow large over time, reaching around £860 billion by the end of the century, depending on many factors including which other environmental taxes were included . However this is not vastly larger than the Norwegian fund today, which is for a very much smaller economy. Furthermore any fund would have the effect of redirecting revenue from consumption to investment, which would probably have a positive macroeconomic effect in the context of historic UK underinvestment.
Would such a measure be socially regressive?
The concern here is that poorer households spend a larger proportion of their income on energy than richer households, and so energy taxes, and thus carbon taxes, tend to hit them disproportionately harder. However poor households still spend less on energy, and therefore carbon, in absolute terms than richer households, so an equal dividend, as I’ve proposed, would have a net progressive effect. Furthermore, households account for only a minority of energy use, but would get the full benefit of dividends (or at least a large proportion), increasing the extent to which it is progressive.
However there are some important intergenerational issues to consider. The proposal for a fund takes the view that present generations should safeguard capital assets so they retain value to future generations. This is in line with the standard definition of sustainable development. However there are distributional issues here which need to be addressed. Some present citizens will be worse off.
How would it fit with other green taxes?
The proposal is clearly consistent with using green taxes more widely as a policy instrument. What’s different from the standard approach to green taxes is the suggestion of placing revenue in capital fund rather than using revenue to fund current expenditure. The landfill tax to which I referred in my original post currently raises around a billion pounds per annum. It would be natural to add this revenue to a UK wealth fund.
Would distribution to citizens be the only use for funds?
There is no reason some of dividends from the fund should not be used to fund things like R&D. As I have previously discussed there are many legitimate calls on revenue from carbon pricing. However there are many compelling arguments for allocation direct to citizens, and this should in my view be a priority for the fund.
Each of these questions requires further elaboration of course, and there are many other questions to be resolved. The design of any major new institution such as a carbon wealth fund will require a great deal of consideration of a range of issues. However further examination appears to strengthen rather than weaken the case for such a fund.
Adam Whitmore – 22nd March 2017
Thanks to John Rhys for raising some of these issues. A variant of this post, responding to John’s points, was published on his website.
 See Cummine (2016) cited in my original post for further details For a specific proposal for a UK wealth fund: http://www.smf.co.uk/press-release-conservative-mp-calls-for-uk-sovereign-wealth-fund-to-address-long-term-and-structurally-ingrained-weaknesses-of-the-economy/
 See Barnes, Who Owns the Sky (2001)
 This problem does not arise for the conventional resources (such as oil and gas) that typically provide the income for sovereign wealth funds of the nations where the resources are located. There is an interesting question as to whether countries should have full property rights to natural resources within their territories, as is often assumed at present, but this is too large a subject to go into here.
 The assumption here is that increasing prices from current low levels will increase revenue. Carbon prices would increase by a factor of say five or more in many cases, and it is unlikely that emissions would decrease by an equal factor – though if they did it would be very good news.
 This assumes 400 million tonnes of emissions are priced, compared with 2015 totals of 404 million for CO2 emissions and 496 total greenhouse gases (source: BEIS), implying a high proportion of emissions are assumed to be priced. The carbon price is assumed to be £40/tonne, roughly the Social Cost of Carbon at current exchange rates and well above current price levels. This would give total revenue of £16 billion in the first year based on both volumes and prices substantially greater than current levels, but still less than 1% of UK GDP of approximately £1870 billion in 2015. (source: https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom-uk-since-2000/ )
 Assuming that the UK reduces its emissions in line with the Climate Change Act target of an 80% reduction from 1990 levels by 2050, and then to zero by the end of the century, and that 80% of emissions are priced at the Social Cost of Carbon as estimated by the US EPA, converted at current exchange rates of $1.25/£.
 Sustainable development is usually characterised as meeting the needs of present generations without compromising the ability of future generations to meet their own needs.