Home > economics of climate change > Fee and dividend vs. cap and trade

Fee and dividend vs. cap and trade

James Hansen is not an economist.  But after Lovelock he is arguably the most eminent climatologist ever and currently director of Nasa’s Institute for Space Studies.  Like others of his profession, Hansen knows that the Earth’s climate is close to tipping points and that it “is a dead certainty that continued high emissions will create a chaotic dynamic situation for young people, with deteriorating climate conditions out of their control.”

But Hansen has what he thinks may be – if we are lucky – an eleventh hour escape.  It is economic in nature.  As economists we might want to do our part and develop and promote it further.  Hansen notes that in response to Kyoto’s cap and trade with offsets – a system for “paying off numerous special interests” – global emissions, as predicted, rose faster than ever.  We need instead, Hansen says, “an honest approach, raising the price of carbon emissions and leaving the dirtiest fossil fuels in the ground.”  Use of fossil fuels, he argues, will continue unabated so long as they remain the cheapest.  But they are “cheapest” only because they are in effect subsidized, as “they are not made to pay for their effects on human health, the environment and future climate.”

The solution Hansen advocates, called “fee and dividend”, works as follows.

 Governments must place a uniform rising price on carbon, collected at the fossil fuel source – the mine or port of entry. The fee should be given to the public in toto, as a uniform dividend, payroll tax deduction, or both.  Such a tax is progressive – the dividend exceeds added energy costs for 60 percent of the public. Fee-and-dividend stimulates the economy, providing the public the means to adjust lifestyles and energy infrastructure.

Fee-and-dividend can begin with the countries now considering cap-and-trade. Other countries will either agree to a carbon fee or have duties placed on their products that are made with fossil fuels. As the carbon price rises, most coal, tar sands and oil shale will be left in the ground. The market place will determine the roles of energy efficiency, renewable energy, and nuclear power in our clean energy future.

Any thoughts, economists?

Hansen, I should add, believes that global politicians will adopt such measures only if given “a cold hard slap in the face”.  “It will take,” and this is the title of his article in the print version of The Observer, “a lot of us – probably in the streets.”

Here are links to two versions of Hansen’s recent article:

  1. December 3, 2009 at 4:37 pm

    Cap and Trade schemes are ineffective, counterproductive, and environmentally damaging, while carbon offsets are an out and out fraud.


    • December 5, 2009 at 4:24 pm

      The article does not support the sweeping assertion. For example, it ignores both permits sold at auction and permits with a set minimum price, so the blanket condemnation is based on a critique of one specific family of cap and trade systems.

      Its also overstating to say “carbon offset are an out and out fraud”.

      The fact is that any policy is subject to being drawn up in a self-defeating way or a way open to widespread abuse – cap and auction, carbon offsets, carbon taxes,

      The normal shape of this kind of argument is to make an apples and oranges policy comparison to confirm the policy bias of the person making the comparison, comparing a set of flawed policies as implemented in the real world against a hypothetical version of the preferred alternative.

      But if I was to compare real world tax systems with all their loopholes and the massive industry established for legalized tax evasion against a hypothetical cap and auction policy with carbon offsets, the cap and auction would be the winner. If I was to compare real world tax and cap and auction systems with a hypothetical command and control approach, the command and control approach would be the winner.

      • December 5, 2009 at 4:59 pm

        Bruce, some fair points. I do argue in the article that cap and trade *can* be somewhat effective if we ensure the cheating isn’t permitted. Most importantly, we need to make other important changes in parallel, which need to be deduced from any cap so that we don’t reverse any positive steps forward.

  2. green4living
    May 1, 2010 at 5:18 pm

    What we can say for sure is that “cap & trade” is not just a simple combination of words, but a whole concept we should first understand before jumping to judge if it is indeed there to serve the environment, or would be achieving exactly the opposite. As unfortunatelly, it can be just the next “big bubble” following the subprime morgage crisis …

    (Ref.: http://goo.gl/9stz)

  3. rachelincolombia
    June 13, 2010 at 5:53 pm

    One question I might have would be whether returning the dividend to the public would simply give them the greater income with which to accommodate the higher prices for fossil fuels, thereby limiting any actual reductions made. Any suggestions?

    • Mark
      October 26, 2010 at 2:08 am

      Yes: your logic is flawed because FAD makes dirty energy expensive *relative* to other expenditures. So consumers will have greater incomes but will feel less inclined to spend that income on SUVs (with associated higher fossil fuel costs) and more likely to spend it on an efficient hybrid or electric vehicle… or even perhaps a $6000 Trek Madone full carbon road bike. Oh the irony: trading carbon for carbon!

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