June 26, 2008

It's called *Revenue Neutral Carbon Tax* and It's a Good Thing!

Not "Tax and Dividend." And certainly not "Cap and Dividend."

This is getting ridiculous. On an popular blog ('It's Getting Hot in Here') someone named Alisha Fowler, who, by her own admission, doesn't understand one bit of economics, is lashing out at James Hansen for supposedly suggesting a "Cap and Dividend" scheme to reign in CO2 emissions.

Only problem is, Hansen made no such proposal.

Hansen did not propose "Cap and Dividend", the term he used was "Tax and Dividend" something entirely different. I suggest Fowler looks up Hansen's testimony again. What Hansen has proposed is actually more commonly known as a revenue neutral carbon tax. This what it should be called. I don't know who re-invented this term but calling it "tax and dividend" is evidently a very bad idea as people confuse it with "cap and dividend".

To understand Carbon Tax visit Carbon Tax Center (CTC), an excellent resource on the topic.

Carbon Tax refers to a stipulated amount (such as a starter tax of $37 / ton) of tax applied to carbon content in fuels. Applied at the top most level of fossil fuel chain, i.e., - at the point they are extracted from earth. At the retail level, the starter tax would translate into about 10 cents/gallon of gasoline.

Revenue neutral because the collected amount is returned to the public. This is how it'll work, according to Carbon Tax Center:
Each individual’s receipt of dividends or tax-shifts would be independent of the taxes he or she pays. That is, no person’s benefits would be tied to his or her energy consumption and carbon tax “bill.” This separation of benefits from payments preserves the incentives created by a carbon tax to reduce use of fossil fuels and emit less CO2 into the atmosphere.
How would Carbon Tax reduce emissions? The same way high gasoline prices are doing that - by reducing consumption and generating investment into alternatives. That said, it would be foolish to depend upon oil prices because they tend to fluctuate depending on a number of factors. Carbon tax on the other hand will grow by a predictable amount year after year, as CTC proposes. The $37/ton tax would become $74/ton the second year, $111 the third and so on until it reaches $370 by the tenth year.

It is simple economics that a high and constantly increasing price of energy would create incentives for conservation and efficiency. Industries would go all out to reduce their consumption and pursue alternatives. Money would begin pouring in to find cheaper sources of energy. It's a market driven mechanism and not one that relies on the governments or politics.

A carbon tax has nothing to do with a cap and trade. A large number of people have shown that cap and trade doesn't work. But don't confuse it with carbon tax. There is no cap applied anywhere and no emission credits traded with anyone. Cap and trade schemes such as the Clean Development Mechanism, are very complex, highly susceptible to corruption, take years to implement and have failed miserably in the past as a BBC investigation recently exposed.

Carbon tax on the other hand is a transparent way of putting a price on carbon. It has been applied very successfully in Sweden and elsewhere as well. It's no surprise therefore that so many economists and other eminent people support a carbon tax. In his book, Plan B 3.0, renowned environmentalist Lester Brown calls it an exciting new option.

I briefly met Mr. Brown couple of weeks ago when he visited India to launch his book and deliver a talk. I've been a big believer in Carbon Taxation for a long time so it was great to see him endorse it. I asked him about the support that Cap and Trade traditionally gets versus Carbon Tax which is much less understood by the general public. He responded that almost all economists of the world agree beyond doubt that carbon tax can be a very effective solution in reducing emissions.

When I pointed out that Nick Stern isn't a proponent, his response was that Nick was a supporter earlier but more recently he's changed his position perhaps in view of the political opposition that any taxation scheme receives.

Some of the prominent economists that support carbon tax include Paul Volcker, former chairman of the U.S. Federal Reserve; Lawrence Summers, former president, Harvard University; Nobel laureate Joseph Stiglitz and Jeffrey Sachs, director of the Earth Institute.

Al Gore is another longtime supporter of carbon taxation and in fact he even tried to introduce a version of it during the Clinton administration.

I think the blogosphere is full of far too many people talking authoritatively on issues related to climate change when in fact they have no clue what they're talking about. This is a classic example. The blog where this was posted - It's getting hot in here - is a popular team blog so it's all the more surprising that Fowler wasn't led to the corner and politely told that she's a little off in her evaluation. A day after the post, it still stands without a correction or an update.

For further evidence, check out comments to Alisha Fowler's post. Commentor after commentor goes on and on about why she's wrong and why "cap and dividend" "as proposed by Hansen" is a great idea! None of them have any idea that what Hansen proposed was quite different from what they're talking about.

More Cluelessness Courtesy The Breakthrough Blog

Fowler has cross posted her entry on The Breakthrough Blog where even more cluelessness prevails. Her colleague, Teryn Norris has another post on similar lines vehemently attacking Hansen titled "Is James Hansen Undermining his Credibility." In which he says: "Dr. Hansen declared he would fight against any agenda other than cap-and-dividend." Really Teryn? Did he say that?

5 Comments so far      

Anonymous Anonymous:

Good to come across your blog, that Breakthrough piece is moronic.

What Hansen proposes is very similar to what has become known as Cap & Dividend.

The difference is the mechanism used to price carbon.

Here's the difference:

Cap & Dividend prices carbon by setting a descending carbon cap and auctioning 100% of permits.

Tax and Dividend prices carbon through allowing politicians to set the price necessary to achieve the reductions.

I tend to come down on capping and auction being the better solution because it's driven by what is scientifically necessary and strikes me as more politically viable-- but would be fine with the Hansen plan.

26 June 2008 at 22:36:00 GMT+5:30 link  
Blogger Manu Sharma:

Thanks for your comment. Cap & dividend is much similar to cap and trade. Deciding caps on different industries across the world and ensuring they are fair is a long drawn out process that would take years of negotiations. The BBC story I linked and it's accompanying radio programs reveal how poorly it was implemented in the clean development mechanism.

A carbon tax on the other hand is a simple, transparent instrument that can be implemented tomorrow.

The good folks at Carbon Tax Center have listed out various other advantages of Carbon Tax vis-a-vis Cap & Trade.

26 June 2008 at 22:55:00 GMT+5:30 link  
Anonymous Anonymous:

Hi Manu -

Duly noted - Hansen indeed advocates "tax and dividend." Of course, as you are undoubtedly aware, a cap is theoretically equivalent in function to a tax. The basic mechanisms underlying "tax and dividend" and "cap and dividend" are the same: a carbon price (levied either through an allowance market or a fuels tax) is imposed, and a proportion of the proceeds (Hansen wants 100%) are returned to consumers.

You are also correct to note that cap-and-trade schemes are notoriously difficult to implement, often falling prey to corruption, cost-containment measures, and the like. However, Alisha's criticism is directed not toward this problem, but toward the general idea of sending carbon price revenues back to consumers, rather than using them for clean energy RD&D. Semantic nitpicking aside, this criticism applies equally well to both "tax and dividend" and "cap and dividend" schemes, so I'm not sure why you're in such a huff. If you have substantive criticisms of Alisha's position, well, we're looking forward to hearing them.

On a more personal note: Please chill out. Plenty of well-regarded pundits - e.g., Andy Revkin, here - have had no problem discussing "tax and dividend" and "cap and dividend" schemes in the same breath. In any case, your overheated rhetoric doesn't reflect well on your argument.

-Zach Arnold
Breakthrough Generation Fellow

26 June 2008 at 23:42:00 GMT+5:30 link  
Blogger Manu Sharma:


Thanks for admitting that the two posts by your colleagues mistakenly assumed that Hansen was talking about cap and dividend. I heard from Alisha Fowler and had a brief email exchange. I'm awaiting response to my last email and will respond to your other comments after I'm clear about her response or lack of it.


27 June 2008 at 13:49:00 GMT+5:30 link  
Anonymous Anonymous:

Manu, the problems of corruption, lack of transparency, etc that you reference in regard to CDM are issues particular to allowing offsets in a cap/trade scheme, not to cap/trade itself.

Also, its impossible to know the level of reductions that would accompany a certain carbon tax, especially to project those reductions over time (just like its impossible to know the cost of a carbon credit in advance for cap/trade - each has a particular certainty and an uncertainty).

The carbon tax is considered inherently more efficient than a cap/trade because of the certainty of compliance obligation, e.g. being able to know in 2012 what carbon will cost in 2040. But if you were truly committed to such efficiency, you would have to resign yourself to instituting a tax that will significantly over or under shoot your intended goal for emissions reductions. If you instead are willing to tweak the tax over time to keep it on pace to achieve a certain level of reductions, you have eviscerated the certainty about compliance costs and it is no longer more efficient than a cap/trade program.

29 June 2008 at 05:00:00 GMT+5:30 link  

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