Fee and Divided Carbon Tax

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John Bellamy Foster:

"It is Hansen who has provided the starting point for a realistic climate-change exit strategy aimed at keeping the increase in global average temperatures well below 2°C. He proposes the creation of a “fee-and-dividend” system whereby fossil-fuel companies would be charged an easily implemented carbon fee imposed at the well head, mine shaft, or point of entry, with 100 percent of the revenue collected being distributed monthly to the population on a per capita basis as dividends, with up to two half shares for children per family. Dividends would be sent directly via electronic transfers to bank accounts or debit cards. The carbon fee would be a single, uniform number in the form of dollars per ton of carbon dioxide that would be emitted from the fuel. The carbon fee would then gradually and predictably be ramped up so as to achieve the necessary carbon reductions. Accompanying this would be the elimination of the current subsidies to the fossil-fuel industry.

In testimony to Congress in 2009, Hansen estimated that, based on 2007 data, the adoption in the United States of a fossil-fuel carbon fee of $115 for every ton of carbon dioxide emitted from fossil fuel (equivalent to a $1 increase per gallon of gasoline, or about 8 cents per kilowatt hour in electricity charges) would generate $670 billion in dividends. Each adult “legal resident” would receive one share equal to $3,000 a year. A family with two children would receive around $9,000 a year, with $750 a month deposited into its bank account. Attempts by energy companies to raise the prices of fossil fuels for end users in response would decrease demand for fossil fuels while encouraging innovation in alternative energies. Some 60 percent of the population would receive net economic benefits, i.e., the dividends they received back would exceed the increased prices paid.9 These net benefits would of course increase if they were to reduce their carbon footprints further.

“Economic modeling for the U.S.,” Hansen has stated, “shows that [even] a mere $10/tonCO2 fee, rising $10 each year, would reduce emissions 30 percent after a decade—more than a factor of 10 greater than the oil carried by the proposed Keystone XL pipeline, rendering that pipeline superfluous.”10 All of those with less than average carbon footprints, including the vast majority of the population, and particularly the poorer sectors of the population, would experience net monetary gains. Since this is a fee imposed on fossil-fuels companies, themselves among the biggest users of fossil fuels, it would give them the maximum incentive to develop alternative energy sources and keep the fossil fuels in the ground.

Hansen’s plan crucially insists that all of the revenue from the carbon fee go straight to the public instead of governmental agencies, which he considers “virtual arms of the fossil fuel industry.” The relatively minor costs of administering the plan could presumably be paid for out of the federal government’s general fund—as is the case, for example, with the entirety of military spending. He therefore advocates the population adopt the rallying cry “100% or fight!” This is to ensure that the redistributive nature of the proposal remains intact, guaranteeing popular support for the change.11

The class aspect of Hansen’s proposal is crucial. Under fee and dividend, he declares, “Low-income people can gain by limiting their emissions. People with multiple houses, or who fly around the world a lot, will pay more in increased prices than they obtain in the dividend…. If the funds are distributed 100% to the public, the public will allow the fee to rise to high levels, in contrast to the relatively ineffectual carbon price characterizing cap-and-trade or a pure carbon tax.”12 The Congressional Budget Office estimated in 2007 that the carbon footprint of the top quintile of the U.S. economy was more than three times that of the bottom quintile. Likewise the Carbon Tax Center reports that in 2005 the top quintile accounted for 32 percent of total gasoline consumption in the United States, while the bottom quintile account for 9 percent. Hence, the carbon dividends distributed on a per capita basis to the population would mean in effect a redistribution of income from the top quintiles with above average carbon footprints to the bottom quintiles with below average carbon footprints.13

The advantage of Hansen’s fee and dividend from a climate-change standpoint is that it is directly aimed at making the fossil-fuel companies—those who take the fossil fuels out of the ground—pay, while increasing the price of carbon to decrease consumption in every nook and cranny of the economy. It also makes it possible to raise carbon prices to the extent required for a rapid phase out of fossil fuels, while garnering the necessary mass support. “The public will only allow an adequate rising price on carbon,” he contends, “if the system is simple and transparent with the proceeds distributed to the public.”14

Writing for the Nation in 2010, economist Charles Komanoff of the Carbon Tax Center argued that the strength of the fee-and-dividend approach was twofold. First, it “would turn the proceeds of these higher energy costs over to the American public to spend as they wish, rather than to corporate emitters to fatten their bottom lines or to Washington lawmakers to lavish on pet projects. Under fee-and-dividend, each and every American would receive a monthly check, which for most people would offset the higher energy prices caused by the fee.” Second, it would be far superior to the murky carbon price produced by cap and trade, which is set by “a vast trading market and determined by fluctuating factors like the economic growth rate, consumer and producer price elasticities and hedge bets by speculators”—and then further undermined by offsets. The conservative corporate-connected and corporate-funded big environmental groups, such as the Environmental Defense Fund, the Natural Resources Defense Council, and the Pews Charitable Trust, Komanoff points out, prefer cap and trade because of its corporate-friendly character, while fee and dividend appears more popular with grassroots environmental groups. The differences between cap and trade and fee and dividend in terms of simplicity and transparency were dramatized by the bills being considered in Washington in 2009–2010. The carbon-fee bill presented to Congress by Connecticut Democrat John Larson was a mere twenty-one pages long, as opposed to the main cap-and-trade bill being considered by Congress which ran to over 1,500 pages. Yet, emissions reductions under the carbon-fee bill would have been two or three times as great.15

An increased carbon tax through the fee-and-dividend plan is the chief element in Hansen’s climate-change exit strategy, but the overall strategy that he proposes is much wider than this would suggest. Crucial to this approach is the notion that crude oil production (conventional oil based on reserves as estimated variously by the IPCC and the U.S. Energy Information Administration) will peak before mid-century. Based on such assumptions, Hansen and his coauthor Pushker A. Kharecha demonstrated in a 2008 article in Global Biogeochemical Cycles that the burning of the remaining conventional oil and gas is consistent with climate stabilization at or below 2°C (450 ppm atmospheric CO2). But this is true only if accompanied by a phase out of coal-fired plants without carbon capture and sequestration technology (a technology which is not yet feasible), and provided there is no recourse to unconventional fossil fuels—such as tar sands oil, shale oil and gas, and methane hydrates. Hansen considers coal and unconventional fossil fuels as “death trains,” not only because these are the dirtiest of fuels, but also because their use will break the carbon budget. Canada’s tar sands, he says, contain 240 gigatons of carbon while U.S. shale contains a further 300 gigatons. If we burn it all on top of conventional fuels there is no hope of avoiding the planetary tipping point.16

The Hansen strategy hopes for a massive transformation of energy infrastructure. He supports Al Gore’s call, issued in 2008, for the building of a carbon-free energy infrastructure in the United States. Nevertheless, Hansen recognizes that a massive shift in infrastructure would take decades. In the meantime, therefore, direct carbon conservation—the limiting of consumption through conservation techniques of reducing, reusing, recycling, and rationing (putting this ahead of immediate economic considerations)—becomes even more important.17

Another key element in the Hansen climate-change exit strategy is to carry out a global transition in “farming and forestry practices” in order to “enhance carbon retention and storage in the soil and biosphere,” including global reforestation. This could generate an “anthropogenic drawdown of atmospheric CO2.” Power plants can move toward burning biofuels if they use carbon capture and sequestration technologies and provided it is not at the expense of food crops and tropical forests, relying instead on “agricultural waste, natural grasses, and other cellulosic materials.”18 (However, it should be added that there are legitimate concerns—overlooked by Hansen—about burning agriculture “waste” which in most cases should be returned to the soil to cycle nutrients and help maintain its fertility. It also makes more ecological and energy sense to use natural grasses to feed cattle and other ruminants, instead of corn and soybeans.)

In addition to recommending various forms of alternative energy as replacements to fossil fuels, Hansen also advocates a potential fourth generation of nuclear power—provided that the dangers of this form of energy can be substantially reduced. Faced with a dire choice between certain planetary catastrophe without a shift from fossil fuels, and a shift to nuclear power with its attendant dangers, Hansen has cautiously insisted on the need to pursue technological possibilities that may emerge with respect to the latter. In the future, nuclear power could be, he writes, “one viable alternative option, if strict provisions are followed for public safety, waste disposal, and elimination of potential weapons-grade by-products.” However, since fourth generation nuclear power is not developed yet, and since it takes seven-to-ten years to build a nuclear power plant, this does not loom overlarge in his strategy.19 He has, however, rejected geoengineering solutions, such as sustained stratospheric sulfate aerosol injection, as involving “long-term risks to climate and ocean/stratospheric chemistry.”20 Finally, Hansen insists on the need to work intensively at reducing non-CO2 atmospheric forcings, such as those related to methane, tropospheric ozone, and black carbon.21

Hansen is not only the world’s foremost climate scientist, but also a leading climate activist. He has been arrested in an attempt to block coal-fired plants and in a protest over the Keystone XL pipeline designed to bring Alberta tar sands oil to the Gulf of Mexico. His activism, and willingness to be arrested in relation to these issues, shows what he considers to be essential. With peak crude oil approaching, the world’s proven conventional oil and natural gas reserves could all be burned while conceivably keeping global average temperatures below 2°C. Nevertheless, if we go too far into coal supplies and encourage tar sands production, the “game,” Hansen contends, will be “over.” The goal therefore must be to stabilize emissions around peak conventional oil and natural gas production, before major inroads are made into the use of the remaining coal reserves and unconventional fossil fuels. The greatest failures of the Obama administration so far, in his view, are its continued support of coal-fired plants, its backing of Canadian tar sands production, its likely approval (delayed so far only by environmental protests and the 2012 elections) of the Keystone XL pipeline, and its refusal to push for carbon fee and dividend—in that order. For Hansen blocking the burning of coal and unconventional fossil fuels is essential if any chance of climate stabilization is to remain possible, and thus he calls for mass mobilization and citizen action. There is no other way given the power of the fossil-fuel industry.22 A mere increase in the carbon price is insufficient where coal and unconventional fossil fuels are concerned, and actual bans are necessary.

Hansen has lobbied governments throughout the world to introduce a fee and dividend system. Given that Washington and other capitals of the G-8 are governed by the fossil-fuel industry and “big money,” Hansen doubts that the core economies of the world capitalist system will move first in adopting such a system. In fact, Canada, the United States, and Norway are all involved in the expansion of tar sands production. With the United States unwilling to act, world leadership in this area increasingly falls on China which, he believes, represents “the best hope.” China is now the world leader in non-carbon energy investments, such as “nuclear, wind, and solar power.” Yet “these carbon-free energies,” Hansen writes, “will supplant fossil fuels, in China and the world, only when a rising carbon fee forces fossil fuels to pay their costs to society. No nation will impose an internal fee that seriously disadvantages itself in international commerce. But an internal fee-and-dividend system, with a modest initial carbon price, will be a boon to the nation that leads, and provide a framework for international discussion.” Current World Trade Organization rules allow a nation that imposes a carbon fee to levy duties on products from other nations that do not have a carbon equivalent fee or tax, making it relatively easy to generate a global carbon fee/tax system.

Hansen insists China does not have the same moral responsibility to take the lead on climate change, as do the United States, Russia, Germany, and the United Kingdom—the countries with the largest cumulative carbon emissions. The United States is responsible for 27 percent of the cumulative, historical carbon dioxide emissions, while China, with three times the population, is responsible to date for only about 10 percent." (http://monthlyreview.org/2013/02/01/james-hansen-and-the-climate-change-exit-strategy)