Changing the political environment: taxing carbon by the ton and distributing the receipts back by the person

Two remarkably similar proposals for “putting a price on carbon” have been put forward from very different sources. Both constructive and well thought out, both would initiate a cycle profoundly changing the political landscape in ways neither organization spells out in their advocacy.

It is a bit startling that the advocates for the two proposals — one an avowedly non-partisan organization that is probably largely comprised of Democrats and the other outspokenly Republican — ignore the political consequences that would ensue. If either of these two proposals were enacted, it would dramatically change the political calculus for the “put a price on it” debate going forward.

WHAT AN ENVIRONMENTALLY-CENTRIC ORGANIZATION PROPOSES

Citizens Climate Lobby (CCL)is a decade-old organization of climate change activists that has been pushing “carbon fee and dividend” as a national solution since they began. Their basic idea is that fossil fuels are taxed (in CCL’s nomenclature this is called a “fee”) by the ton of CO2 emissions they create and the entire proceeds are refunded to American households: full shares for adults and half shares for children. CCL’s fee would begin at $15 a ton of CO2 created by burning the fuel rising each year, forever, by an additional $10 a ton.

As a point of reference, $15 a ton translates into roughly 15 cents a gallon for gas at the pump. So CCL’s ever-rising fee would grow past $200 a ton, or $2 a gallon, in two decades.

It is a fundamental principle of CCL to be non-partisan and this positioning is relentlessly practical. They know they need bipartisan support to make something this ambitious happen. Almost all Congressional Republicans are signed on to the Grover Norquist pledge to oppose any “net tax increase”. Since CCL’s proposal is to refund all the money back to taxpayers, it is “revenue-neutral” and can be supported by signers of the Norquist pledge. It would seem that CCL named their plan “carbon fee and dividend” with the Republican aversion to “taxes” very much in mind.

WHAT A MARKET-CENTRIC ORGANIZATION PROPOSES

Climate Leadership Council (CLC), an avowedly Republican group, organized by Ted Halstead (who has a really great Ted talk on the subject) , has a very similar proposal. CLC’s formula is to start the tax at $40 a ton and have it rise annually by 2% over inflation. (So CLC starts out much more ambitious than CCL but, unless inflation changes dramatically, will rise much more slowly and, in a few years, CCL’s number would be bigger.) Like CCL, they refund all the money raised to individual taxpayers.It is a fundamental principle of CCL to be non-partisan and this positioning is relentlessly practical. They know they need bipartisan support to make something this ambitious happen.

Their refund formula is to send back all the money to taxpayers by social security number. CLC estimates that their $40 a ton tax (which means an increase of 40 cents per gallon at the pump) would result in a $2000 annual payment to a household of four in the first year.

CLC’s proposal also calls for the elimination of some regulations on fossil fuels that would presumably be mooted by the behavior changes the tax would cause. This is meant to be attractive to other Republicans but it does give Democrats and environmentalists legitimate reasons for concern.

THEIR POLITICAL ENVIRONMENTS ARE DIFFERENT

CCL and CLC play in two entirely different sandboxes. In the world of climate organizations and the environmentally-concerned, CCL’s proposal strikes many as timid and conservative. While there is a broad consensus among environmentalists that we have to “put a price on carbon”, the most active and organized want to use the money raised to finance further development and implementation of climate-friendly energy solutions. So far the broad agreement that we should put a price on carbon has, at the national level, never overcome the endless internal quarrel as to how and what to do with the money.

We keep witnessing examples that call for remembering the wise admonition: “don’t let the perfect be the enemy of the good”. The most recent was the defeat of a Washington State referendum last November to institute a carbon tax, with widespread opposition from environmentalists who complained about how the money raised from the tax would be spent.

On the other hand, CLC is proudly Republican. Halstead recruited former GOP Secretaries of State James Baker and George Schultz and leading Republican economists Martin Feldstein and Gregory Mankiw (as well as former NYC Mayor Michael Bloomberg and Obama’s first energy secretary, scientist Stephen Chu) to headline his initiative. (Schultz is also on the Board of CCL.) They all seem to believe that Ronald Reagan would have loved this idea.

In the CLC world — even after the Texas and Florida disasters — there is a large population of climate change deniers. Perhaps for this reason, CLC focuses its argument on the market distortion that fossil fuels represent, more than on the environmental danger. CLC sees a “market failure” in the fact that burning fossil fuels create downstream “costs”, what economists called “externalities”, that the rest of us must bear. They believe that taxing carbon is the only way that the market can factor in the economic advantages of renewables that don’t pollute. (CCL also explicitly calls out the “market failure” in its advocacy.)

To a conservative, a tax that is used to correct a market failure can be seen as a good thing. And they believe in small government; their faith is that all will be well if we can just make markets work correctly. Thus, they’re most comfortable with refunding whatever revenues are generated to the people rather than having the government keep the money.

THEY’RE BOTH IGNORING THE SAME BIG POINT

But here’s what is really striking to me.

Both CCL and CLC are proposing “one time fix” solutions that formulate how to raise the tax into the future: they create a rule for raising the tax at the start and in their advocacy assume that we’ll just continue to follow it. Their proposals are meant to solve the question of how to price carbon once and for all. And the voluminous discussion and debate I have heard about the two plans always appears to accept the assumption that once they are implemented, they will not be tampered with.

Both CCL and CLC have proposed open-ended formulas for how the tax will grow over time. And that aspect of both plans — that they constitute ongoing solutions rather than just starting points — is not challenged when the people on the “left” argue that CCL is too timid and the people on the “right” argue that CLC is sticking the government’s nose into the economy’s business.

All sides — those making the proposals and those debating them — are ignoring (or, at the very least, eliding) that the world changes when we start taxing carbon which is used by people, businesses, governments, and anybody else and start writing checks to individual people — not any other entities — with the proceeds.

What would really happen is that the entire dynamic of taxing carbon would change. Under either proposal, the base of contributions being larger than the base of recipients means that something like 70 percent of the public — the voters — will get more back in their dividend than the carbon tax costs them out of pocket. And more than half will benefit substantially.

In fact, since the dividend payment will be monthly or quarterly or annually, it will be a really noticeable check to many people. And the spending on carbon — at the pump or elsewhere — is both somewhat controllable (that’s part of the point) and an event-by-event drip of much smaller amounts of money. The check received will be much more noticeable than the additional “taxes” paid, even before anybody does their personal calculation.

What seems to be missed on all sides — for and against each proposal and even in the most penetrating analyses — is the cycle effect this would inevitably create. Whether it is a “vicious cycle” or a “virtuous circle” depends entirely on your point of view.

THE FIRST REALLY POPULAR TAX

If most households get more money in their checks than the tax is costing them, it is in their self-interest to get the tax raised. If a household gets $2000 from a $40 a ton tax, more than half of which will in many cases be “profit”(assuming the other half goes to cover their own carbon expenses such as gasoline for their cars and heating oil for their homes), why wouldn’t they support raising it to $80 a ton? Or $120 a ton?

The opposition to the revenue-neutral approach from strong environmentalists is, of course, well-motivated. They recognize the need for additional investment in renewables, and the logic for getting that funding by taxing carbon seems obvious. But — like the advocates of the dividend plans — they are also not thinking carefully enough about the political implications of a full refund scheme.

From my perspective, it looks like the CCLers should be telling their more “progressive” environmental allies to keep their cotton-picking hands off the money that carbon taxing can raise. I haven’t seen that message delivered. Saying it straight would be something like this:

Every dollar that is taken away from a dividend to support green research or for any other purpose, however worthy, reduces the future base of support for raising the carbon tax further.

And we almost certainly need to raise it further and faster.

One energy expert I know said privately that it will take a carbon tax of $200 a ton to generate the changes we need to see in consumer and business planning behavior to sufficiently accelerate renewables. But if we really refund all the money from taxing carbon to individuals, we could get there much faster than either the CCL or CLC annual rises would deliver because there will be a large constituency of people who will personally benefit from raising it.

Think about how easy it will be for people to support a drastic economic step to save the planet if they personally benefit financially at the same time!

The political power of a revenue-neutral approach is demonstrated by the different recent experiences of British Columbia and Australia with carbon taxes. British Columbia, which cuts other taxes to the full extent of the carbon tax’s financial contribution (although it is not refunded as a “dividend”), continues to have strong support for the tax. Australia’s approach, which siphoned off much of the money for other purposes, lasted only a couple of years before it was effectively killed.

On the other side, the CLC contingent should expect that their fellow conservatives will figure this out at some point and accuse them of naivete, or worse, in believing that they can unleash this dynamic and hold the carbon tax increase to the level of their original proposal.

What cycle could be more vicious to a conservative than a tax the majority of the public will see a personal interest in raising?

So it is important for those of us who recognize the great danger presented by CO2 to focus on the first step in both of the plans: establishing a regime that will put a price on fossil fuels when they enter the economy and sending the money that raises back to all people equally. That is the key. It is more important than the other tradeoffs (CCL makes the dividend a “taxable” event and CLC wants to reduce existing regulation) and it is much more important than what either plan tells you will be happening three or five years after it is first implemented.

There is, indeed, one very useful point of experience which underscores the value of the dividend: the State of Alaska gives its citizens an annual check for their share of the oil revenue delivered by drilling in the state.

In 2016, each citizen of Alaska got over $1000 from that fund. You won’t find a lot of Alaska politicians of either party trying to stop oil drilling in their state or on their coastline as a result. In the same way that Alaska, probably inadvertently, created a political foundation to support drilling for oil, a fully-refunded carbon tax can do the same for taxing fossil fuels.

To those of us who believe that “putting a price on carbon” is the single most important and effective tactic available to support the development of renewables, getting a version of either CCL’s or CLC’s proposal passed would be a giant step forward. Let’s hope that the CCL opposition to their left sees the bigger picture and accepts a full dividend and that the CLC opposition to their right does not and therefore misses what could be their most effective argument among conservatives.

I am personally a walking contradiction — actively lobbying with the non-partisan CCL and, outside CCL an engaged and politically-active Democrat urging members of my party to openly embrace the Republican proposal — but I’d be happy to start with either version and would look forward with optimism to what would happen next.

Mike Shatzkin is a book publishing lifer and for the past three decades has been a recognized thought leader on the industry’s digital change. He comments on that topic regularly on a blog called The Shatzkin Files. He has recently immersed himself in the challenge of climate change, and with Lena Tabori, another book publishing lifer, is organizing an educational and networking hub called ClimateChangeResources.com to use their publishing, curation, and communication skills and networks on behalf of mankind’s existential challenge.