Category Archives: Revenue

How not to squander $130 trillion

Carbon pricing should be used to establish wealth funds from which current and future citizens can benefit. 

The world has a limited carbon budget …

Climate change depends on the cumulative total of emissions of greenhouse gases, so total cumulative emissions globally must be limited by the need to limit climate change.  This limited total of cumulative emissions is sometimes referred to as a global carbon budget.  Specifically, if global mean surface temperature rises are to be limited two degrees centigrade, as now mandated in the Paris Agreement, total cumulative CO2 emissions from now on must be limited to around 1600 billion tonnes of CO2[1]. From this perspective the atmosphere is a finite resource that can only be used once, rather like any exhaustible natural resource, with the important caveat that (unlike many natural resources) no more atmosphere remains to be discovered.

But currently the value of this resource is being squandered …

At the moment only a very small proportion of greenhouse gas emissions is priced adequately.  Most emissions remain unpriced, and the growing proportion that is priced is mostly sold at well below both the cost of damages, and well below the value of an increasingly scarce resource.  A valuable scarce resource is thus being given away or sold below cost, subsidising emitters.  Huge natural wealth is being squandered.  And once gone it can never be replaced[2].

It would be better to use revenue from carbon pricing to create a wealth fund to benefit both current and future generations …

So is there a better approach to managing this precious resource?  It seems to me that there is. It would be much better to realise value of emissions in the form of a fund for citizens, with proceeds from carbon pricing (the sale of allowances or taxes) at adequate levels paid into the fund.  Carbon pricing should be comprehensive, with prices at adequate levels.  The finite volume of the resource implies it is best used to establish a wealth fund, where financial capital is built as natural capital is used up.  The fund would belong to all citizens.  Granting its value to citizens would surely encourage better management of the atmosphere, and thus the climate, and higher carbon prices than generally prevail at present.

Such a fund would be analogous to a sovereign wealth fund based on oil and gas reserves, of which the Norwegian fund is the leading example[3].  Wealth is invested in productive activity, with the income from this available to fund pensions and other expenditure. So, how much might this resource be worth in purely financial terms?

Such a fund could be enormously valuable …

Each tonne of CO2 emitted to the atmosphere should be priced at a minimum of the cost of damages from climate change – the social cost of carbon. This is currently around US$50/tonne, and rising over time.  Emissions may be more valuable than this, either because of the limitations in estimates of the social cost of carbon (see here), or because the value of the emissions in terms of the economic activity they enable is greater than their cost in environmental damage.  But evaluating the resource at its cost at least puts a lower bound on its value, unless the economic value of those emissions is below the cost assumed here, which seems unlikely with such a constraining budget[4].

The profile of emissions also matters.  For simplicity I’ll assume current emission levels to 2020, then a linear decrease to the end of this century[5].  This is broadly similar to many emissions tracks that have been modelled as consistent with 2 degree warming, and (consistent with this) the cumulative total is close to the 1600 billion tonnes budget I mentioned above.  It is also consistent with the Paris Agreement goals of reaching net zero emissions at some point in the second half of the century[6].

The annual value of emissions is then estimated from multiplying the (rising) cost of emissions with the (falling) quantity of emissions.  This is shown in the chart below.  The effects of rising prices and falling emissions roughly balance over the next 50-60 years or so, with revenues remaining roughly similar at close to $2 trillion p.a..  Revenues then fall rapidly in the last quarter of the century as emissions fall to zero.  The eventual value of the fund, excluding investment returns and dividends paid out, is the sum of these annual revenues (the area under the curve).

Chart: Potential annual revenue into carbon funds globally … chart

On this basis, the total value of the remaining carbon budget is a staggering $130 trillion.  This is equivalent to $13,000 for each person in the world, assuming world population of 10 billion people later this century.  A 3% annual dividend from this would generate about $400 p.a. for everyone .

Towards a citizens’ dividend …

Dividends from the fund could be used in many ways.  One approach with a range of advantages is distributing benefits to all in the form of a “citizen’s dividend”.  There is already a feature of the Alaskan wealth fund derived from oil revenues, where distribution is in the form of a Permanent Fund Dividend to all citizens.  This is widely considered to have helped build and maintain public support for the scheme[7].

This approach is closely related to the idea of “tax and dividend” carbon pricing.  I have previously argued that such approaches have merit, and indeed tax and dividend has recently been advocated by senior Republicans in the USA[8].  However, there is an important difference between a fund and tax and dividend as often presented, in that revenues are used to establish a fund that is intended to be permanent, whereas tax and dividend proposals often assume revenues to be distributed in full.

There is also a relationship between the idea of a citizen’s dividend and a universal basic income, which is much discussed at the moment and subject to a few trials.  However, there is a crucial difference in that the citizen’s dividend does not seek to provide an adequate income.  Rather it is simply a return on funds invested.  Instead, it is likely to be one component of any universal basic income.

Who would benefit?

There is a natural case for distributing dividends equally, as all have equal rights to the atmosphere.  The atmosphere is a global resource, and climate change knows no borders, so it is natural to make any fund global.  However establishing such an arrangement is likely to be too great a political challenge.

A bottom up approach with individual nations pricing carbon and establishing their own funds is likely to be much more tractable.  Such a national approach would have other advantages.  For example, it would allow other environmental taxes, such as those on landfill, and indeed other sources of revenue to contribute to the fund.  A series of national funds would not stop any fund being used to finance activities of international benefit – indeed such uses would be highly desirable.

Establishing national funds will have many challenges.  However the prize seems large enough to be worth pursuing.  The current system of simply allowing emissions to be dumped into the atmosphere, often free of charge and almost always too cheaply, is a waste of a unique and irreplaceable asset.  Irreplaceable natural wealth such as the atmosphere should be managed carefully, not squandered recklessly.

Adam Whitmore – 13th February 2017 

[1] Based on “Warming caused by cumulative carbon emissions towards the trillionth tonne”.  Allen et. al. Nature vol. 458 (2009), adjusted for emissions since the publication of that paper.

[2] Many people, including me, would also wish to note the ethical dimension here.  It is not appropriate to treat the atmosphere only as mere resource for people to use as they wish, and all decisions about its management must reflect ethical considerations, including responsibilities to future generations, and the duty of care to the world’s natural heritage.  I am simply arguing here that treating it as valuable resource would be a major step forward from treating it as a resource to be used as though it were unlimited and emissions were inconsequential, as is often the case at present.

[3] For an excellent review of Sovereign Wealth Funds and how they could be better managed and used for the benefit of citizens see Angela Cummine, Citizens’ Wealth, Yale University Press, 2016.

[4] If the price would be lower than the SCC with this emissions track it implies that the 2 degree target is too loose and 1.5 degree or lower would be preferred.

[5] This is a rough and ready calculation, taking CO2 emissions from energy and industry only.  It ignores the effect of other gases and effectively assumes other sources of CO2, mainly deforestation, are approximately net zero cumulatively over the century after taking into account the role of sinks and deforestation.  This may be optimistic.  Adjusting for these would lead to a higher starting point and steeper decrease in emissions, reducing somewhat the value of the fund.

[6] In this scenario emissions are low enough to be balanced by a small quantity of negative emissions by the last decade of the century.

[7] See Angela Cummine, Citizens’ Wealth, Yale University Press, 2016., p.140-2.

[8] See “US Republican elders push for carbon tax”, Carbon Pulse, 8th February 2017

Uses of revenues from carbon pricing

There are many worthwhile uses for revenues for carbon pricing.  In practice a mixture of uses is likely to be found. 

My previous post estimated that carbon pricing will raise around $22 billion worldwide this year, and suggested that this has the potential to grow by an order of magnitude.  This post looks at how revenues might be used.

Revenues from carbon pricing can be used for both climate change related purposes and more general purposes.  The main categories are summarised in the table, and described briefly below.

Summary of potential uses of revenue raised by carbon pricing

General fiscal and social goals Climate change related purposes
Support for vulnerable groups Adaptation
Reduction of other taxes Distribution to those affected by climate change
Government retention of revenues Support for further emissions reduction, including for innovation
Returned to citizens

Support for vulnerable groups

The introduction of carbon pricing is often accompanied by concerns about the effects on energy prices on lower income households.  Rises in electricity prices to households due to pricing of power sector emissions are of concern even under schemes such as the EUETS which do not directly cover households.

Some proportion of revenue can be set aside to compensate vulnerable households.  This was a feature of the now repealed Australian scheme.

Reduction of other taxes

Other taxes can be reduced by an amount equal to the revenue raised from carbon pricing.  If this is done in full the carbon pricing scheme is usually referred to as revenue neutral.  This is a feature of the British Columbia carbon tax.

Government retention of revenues.

Governments can retain some or all of the revenue for general expenditure or deficit reduction.  This is, for example, the case in the UK, where the Treasury has a long history of viewing taxation and expenditure as a whole, and there is resistance to earmarking (“hypothecation”) of funds.

Returned to citizens.

An equal payment can be made to all citizens in a jurisdiction (see previous post).  The Swiss carbon tax currently returns a portion of revenue equally to all citizens.  Such an approach has been proposed as part of bills at federal and state level in the USA.

Adaptation

Measures to adapt to climate change can be funded either within the jurisdiction that raised the revenue or internationally.  For example, in its July proposals for the next phase of the EUETS, the European Commission included provisions for Member States to use some of the revenues from the EUETS to finance actions to help other countries adapt to the impacts of climate change.

Funds could be channelled through international institutions to provide funds to match national expenditure, potentially making a substantial contribution to meeting any funding shortfalls.

Distribution to those affected by climate change

Funds could be provided to those adversely affected by climate change.  There is a continuing debate on this issue and how it relates the “loss and damage” agenda within the UNFCCC process, including the large overlap with the issue of adaptation.  However there has been little practical progress on this to date.

Support for further emissions reduction and for innovation

Funds may be provided for measures such as retrofitting homes and businesses for greater energy efficiency, and the installation of renewable energy technologies.  Revenues may also be used to fund research, development and deployment of new low carbon technologies.  A number of schemes in North America include provisions of this type, including California, RGGI and Alberta.  The EUETS has also included support for new technology from the sale of 300 million allowances from the new entrant reserve (the “NER 300”).  However funds raised from this were less than originally expected due to lower allowance prices, and the allocation process has been delayed.  The EU is now planning an Innovation Fund in the 2020s, again to be funded by the sale of allowances.

So which should be preferred?

Many uses of funds have merit, and the choice will depend on local political and economic circumstances.  However some seem to have particular arguments in their favour, with a mixture of often likely to be preferred.

Supporting adaptation and potentially also providing recompense to those adversely affected by climate change has a strong appeal on grounds of justice, and may form a valuable element of some programmes.

Returning funds equally to citizens has advantages covered in my previous post.  This could be accompanied by providing additional support to some vulnerable groups.

Finally, using revenue to fund additional emissions reductions, especially with a component of assistance for the disadvantaged, has proved understandably attractive in a number of jurisdictions in North America and to some extent in the EU.  Deeper emissions cuts will require new technologies and large-scale investment.  This in turn requires progress to be made now, increasing in scope and extent over time.  Increased use of funds from carbon pricing to support such efforts seems likely to prove worthwhile.

Adam Whitmore – 10th November 2015

Material in this post, as well as my previous one, can also be found in the Carbon Markets Investment Association (CMIA) paper at http://cmia.net/forums/climate-finance-forum/climate-finance-forum-docs

Revenue from carbon pricing

Carbon pricing already raises over $20 billion p.a. worldwide.  This has the potential to grow by an order of magnitude.  What to do with this money will be an increasing important issue.

As carbon pricing spreads around the world (see here) substantial amounts of money are now being raised.  The amounts depend on:

  1. The coverage of each scheme
  2. The number of allowances allocated free of charge (under an emissions trading scheme) or the extent of tax exemptions and rebates (under a carbon tax).
  3. The level of the price in each scheme

Estimating these parameters for each scheme around the world indicates that about $22 billion will be raised globally this year, excluding the value of free allowances, tax exemptions and rebates.  The breakdown of this total is shown in the chart below.  (The data is a rough estimate in some cases because summary data on coverage and rebates is not readily available for some schemes, especially carbon taxes in Europe.  Also, average prices for allowances over the whole of this year are not yet known.)

About three quarters of the revenue raised is in Europe.  Interestingly, revenues from auctioning of allowances under the EUETS are lower than those from other carbon pricing in Europe, which includes carbon price support in the UK and carbon taxes in France and Scandinavia.  This is in part because EUETS revenues have been reduced this year by the postponement of some allowance auctioning (backloading).

The remainder of revenues raised worldwide are from the various North American schemes and the (rather low) carbon tax in Japan.  There is no auctioning of allowances under the New Zealand or South Korean schemes, or in China, so they don’t yet contribute to the total.

Indicative estimates of revenue from carbon pricing in 2015

revenue chart

Notes: Estimates based on prevailing prices multiplied by volumes covered, excluding freely allocated allowances and tax exemptions and rebates.  Data is estimated from a variety of sources and totals may be lower or higher or than shown as assumptions have been adopted for coverage and rebates where data is not readily available.  Small variations in coverage can affect estimates significantly in individual jurisdictions because of high prices.The Mexican carbon tax is excluded as it does not price emissions from natural gas so more resembles an energy tax on some fuels.  Other Europe includes Portugal, Switzerland and Iceland.

Revenue is significantly higher this year than it was last year, when the total raised worldwide was around $15 billion.  This mainly reflects increases in:

  • prices and volumes of EUAs auctioned;
  • the level of UK carbon price support;
  • the price and coverage of the French carbon tax; and
  • the coverage of the California and Quebec schemes, which expanded to cover transport and other sectors in January this year.

The total revenue raised has the potential to increase vastly if:

  • new schemes are introduced, especially nationally in China as planned and in the USA, or coverage of existing schemes is expanded;
  • the amount of auctioning is increased, with the amount of auctioning in the planned national scheme in China especially important; and
  • prices rise under the major schemes, including the EUETS.

Indeed, over time revenue raised globally could increase by an order of magnitude or from current levels to reach into the hundreds of billions in the longer term.  However even if revenue grows to approximately ten times current levels over the next decade or more it would still represent only perhaps 0.2% of global GDP, and so remain only a small proportion of total flows within the world economy.

This is nevertheless a substantial amount of money, and there is likely to be increasing debate about how it might best be used.  I will return to this in my next post.

Adam Whitmore – 26th October 2015

A paper on revenues from carbon pricing including much of this material has been published by the Climate Markets and Investment Association (CMIA), see http://cmia.net/forums/climate-finance-forum/climate-finance-forum-docs