Advantages of a Carbon Dividends Plan
Most Effective Climate Solution
There is widespread agreement among economists that a carbon tax is the most efficient mechanism to reduce greenhouse gas emissions and correct the fundamental market failure driving climate change, namely, the failure of prices to reflect social and environmental costs. No other policy lever can match its economy-wide effects in changing investment decisions and individual behavior. For a carbon tax to be most effective, the tax rate must increase gradually until emissions reduction targets are met. To avoid the loss of competitiveness or the shift of industry to economies without carbon taxes, border adjustments will also be necessary. Together, a carbon tax with border adjustments can help ensure that other countries follow suit, bringing us closer to a global solution.
Most Popular Climate Solution
The key to making carbon taxes popular is a countervailing incentive that outweighs the tax’s burden. The best candidate is carbon dividends, which would put money directly into people’s hands and reward socially beneficial behavior. Simply put: all proceeds from a nation’s carbon tax would be divided equally among its citizens, and returned to all adults through a quarterly dividend check automatically deposited in their bank accounts. Polls reveal that 64% of Americans favor this plan, including 54% of conservative Republicans. The popularity of dividends is crucial not only to the initial passage of carbon taxes, but also to ensure ongoing support for gradually increasing the carbon tax rate.
Most Equitable Climate Solution
A common concern is that carbon taxes can be regressive, imposing a disproportionate burden on the least fortunate. Pairing carbon taxes with dividends solves this problem and ensures that the most vulnerable benefit economically. Distributional studies show that a majority of Americans – including the bottom three income quintiles – would come out ahead. The reason is simple: the wealthier tend to pollute more, and would therefore face higher costs. This policy is also equitable in another way: since costs increase in direct proportion to one’s carbon footprint and all citizens receive identical dividends, everyone is rewarded equally for reducing their carbon footprint.
Pro-Growth Climate Solution
Given the ongoing weakness of the global economy, an ideal climate strategy would double as a growth strategy. A carbon dividends plan can assist in three important ways. First, a gradually increasing carbon tax would send a powerful market signal that encourages technological innovation and large-scale substitution of existing energy and transportation infrastructures. Second, rising fossil fuel costs would offer companies the predictability they lack in today’s energy market, encouraging longer-term investment. Third, dividends would have an important stimulatory effect by putting cash in the hands of the end consumers most likely to spend it.