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:
http://www.guardian.co.uk/commentisfree/2009/nov/29/copenhagen-summit-climate-change
http://climate.the-environmentalist.org/2009/11/never-give-up-fighting-spirit-lessons.html