Fee and dividend – LVT for the environment

Just occasionally an idea comes along that is simply too good not to pass on.  So it is with James Hansen’s proposal for a ‘fee-and-dividend’ solution to controlling carbon dioxide emissions; it’s remarkably similar in concept to Land Value Tax.

Hansen points out that a successful approach must recognise a fundamental truth; that as long as fossil fuels are cheaper than alternatives their use will increase.  Lobbying against them may have some limited effect at the margin but in the scheme of things it amounts to shovelling fog. 

Hence the failure of Kyoto after which the global rate of increase in carbon dioxide nearly doubled according to Hansen.  In Europe the Emission Trading Scheme has been branded a scam after companies profited but emissions have not reduced while in the US Wall Street played a large part in devising the cap-and-trade scheme which is their equivalent and the big banks expect to make billions of dollars trading carbon permits.  These billions (plus the costs of operating the scheme) have to come from somewhere so in effect this is a tax on energy that will redistribute income from ordinary people to inflated City bonuses.  Great!

With the traders in charge its a racing certainty that the US market will prove as volatile and subject to political meddling as it already has in Europe; traders profit from volatility not from stability.  Yet individuals and companies need stability if they are to make sensible plans to reduce their emissions.     Moreover, many of the supposed benefits are illusory; manufacturers can evade the costs by simply moving production to developing countries while ‘offsets’ – alternatives to emission reductions – are often imaginary or unverifiable.  Hansen also argues that, in practice, cap-and-trade actually sets a floor on emissions; if they fall beneath the cap the carbon price collapses removing the incentive for further reductions – which is just what has happened in Europe.

All in all it’s quite unsupportable, especially when there is an alternative which is simple, elegant and avoids these pitfalls.

This is the ‘fee-and-dividend’ approach.  It works like this: the government collects a carbon fee at the mine or wellhead or port of entry for imports for all fossil fuels;  it is a simple, single amount – £x/tonne based on the contained carbon.  The whole of the fee income is then distributed to the public as a citizens’ dividend.  The price of goods would rise in proportion to how much carbon their manufacture, shipping etc. entailed so the public would pay, but only indirectly.    Companies would gain by the certainty and stability of the extra costs they would face and could plan accordingly.   A family with exactly average carbon consumption would net out, their dividend income exactly covering the higher cost of their energy intensive purchases.   Prudent people would gain at the expense of more profligate types by adjusting their lifestyle, choice of car and other purchases.   However, falling carbon consumption would reduce the dividend year by year so even the most prudent would have to keep cutting to stay ahead of the game. 

Hansen calculates that if the US introduced such a scheme and set the fee for contained carbon at $115 per ton it would increase the price of petrol by $1 per gallon and of electricity by 8 cents per kWh yielding a dividend of $3,000 per year to each adult citizen and that around 60% of voters would emerge as winners.  In practice it would be introduced gradually, with the fee escalating each year over perhaps 15 or 20 years so allowing utilities and others time to change their behaviour, build new plant etc. without causing too big a shock to the system so costs and dividends would never reach anything like these levels.

An obvious objection is that in the hands of Labour fee-and-dividend would mutate into just another stealth tax.  This must not be allowed to happen, nor should it be used to reduce National Insurance as some have suggested because this would only muddy the water.  I would even say that government should absorb the administrative costs from existing resources so that, quite literally, 100% of income would be paid out in dividends.  That would be refreshingly transparent!  

Under fee-and-dividend fossil fuel consumption and carbon emissions would fall as fast as new technologies were developed and deployed but there are other advantages that deserve a mention.

Firstly, many of the early winners would be the very people who most need help.  In effect, high consuming, 4×4 driving types would directly help those whose carbon footprint is limited by their poverty.  In other words, it would be a significantly redistributive measure.

Secondly, the certainty of a known and escalating carbon price would incentivize companies large and small to develop innovative low carbon solutions with the winners then ahead of the curve in developing export markets.  Ministers (and their shadows) love to talk airily of how they plan to promote ‘green jobs’ but it’s strictly BS;  laissez- faire policies have failed.  By contrast Germany, which was an early mover in pushing its industry in the right direction, has already got lots of green jobs – for instance the turbines for the London Array will be German while we struggle to persuade foreign firms to set up here.

Thirdly, although the climate change argument has provided the primary impetus towards carbon reduction, not everyone is convinced by it.   As it happens, we must in any case reduce our addiction to fossil fuels because of the looming threat of peak oil quite independently of any belief about climate change and this provides the basis for building a broader coalition in favour of action.   Fee-and-dividend will push the economy in the right direction.

One for the FPC I think.


4 responses to this post.

  1. This sounds pretty much identical to a carbon tax that is given back to the citizens in rebates. It’s certainly an idea with a lot to recommend it – not least because carbon taxes will prove unpopular if they are seen as just another tax.

    I agree that carbon trading is not a good policy, though not so much because of volatile prices. My concern is that it would be impossible to stop polluting industries getting free carbon permits – as has happened with the proposed American bill and in the EU Trading Scheme.


  2. Some of us LVTers have long suggested something similar, though AFAIK the idea of taxing at the point of entry is an innovation. I seem to remember suggesting it to Chris Huhne when he had the environment brief, since he’s president of ALTER, but he preferred cap and trade.

    I always felt that cap and trade was a bit like enclosing some of the commons, handing it to polluters for free and saying “here, make money out of these if you can” which didn’t sound right.

    It’s also not too dissimilar from the idea of the guy who wrote “Capitalism 3.0” though in his case it would be a non-governmental public trust whose job it would be so that it could not be seen as government revenue to tap into when necessary.


  3. Taxation at the point of entry is good if it means the point of mining/pumping out of the ground, but has pitfalls if applied to the embedded emissions in imports – calculating these is the province of more or less informed guesswork, and would cause endless trade disputes.


  4. Posted by liberaleye on 15 January 2010 at 4:03 pm


    I would say that cap and trade is a LOT like enclosing some of the commons etc…

    Actually its worse than that because the more complicated a scheme, the less transparent it becomes and the more nooks and crannies there are to be exploited.

    A case in point is Corus’ Redcar plant on Teeside which is closing in the next few weeks. It is being reported that “under EU rules” it will get seven million FREE ‘Carbon Emission Trading’ allowances from the EU for the coming year; these are currently worth over £100 million to the company.

    In other words, every adult in the country is contributing over £2 towards incentivising the closure of a big chunk of our industrial infrastructure and the loss of 1,600 direct jobs plus probably the same again in other firms. You really couldn’t make it up.

    The environment team needs to re-examine Emissions Trading.


    Embedded emissions in imports are indeed the weakest link. Land has the advantage here; it cannot be imported.

    I think it means that rates can only be set at a pretty low level initially or we would simply price too many firms out of business. However, that would be the point of an escalating rate (with the early years having very low increments). Firms would have time to plan, do research, whatever, to adjust to a changed world knowing that so doing would put them at a powerful competitive advantage over laggards that sat on their hands.

    It is reasonably likely that other countries will adopt similar measures – particularly China where the leadership knows it has a big problem with its profligate use of energy and needs to cut it sharply for purely domestic reasons.

    As for volatility, it might not matter too much in theory but it sure does in practice. From experience I would say that boards are hugely influenced by CURRENT market prices even if there is every reason to think them unsustainably low. Projects will not get the green light and research programs will be cancelled. The future is so uncertain that adding yet more uncertainty is unhelpful.


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