Carbon Dividend: The Revenue-Neutral Solution to Incentivizing Renewable Energy

By Nathan LesserPublished August 31, 2022

In recent decades, there has been a perilous growth in harmful greenhouse gas emissions. Carbon dioxide, the largest of these pollutants, is primarily exhausted through the combustion of fossil fuels for energy use. Until there is a global mitigation of greenhouse gas production, anthropogenic climate change will continue. Luckily, there is a feasible economic policy to curb carbon emissions both within the United States and across the world. This innovative and pragmatic plan is known as a carbon dividend, a creative use of carbon pricing for social welfare. Specifically, the carbon dividend is an escalating national tax on carbon per ton––whether produced or imported––which is paid to the government and then equally redistributed back to citizens. If a carbon pricing system is enforced in the United States, countrywide production would reach net zero carbon emissions by 2050 and compel other large emitters such as China, India, and Russia to innovate cleaner energy sources or bear the economic burden. 

Currently, the energy market is inadequately regulated. This paradigm allows for business models to prioritize private profit while disregarding external social damage in the form of major pollutants. The resulting overproduction of these pollutants is a treacherous trend for global warming and atmospheric damage. The most feasible and sustainable solution is the carbon dividend, and this policy has gained traction in recent years. For example, it was formally proposed as legislation in The Energy Innovation and Carbon Dividend Act of 2019, which is now backed by 90 cosponsor Democratic Congressmembers. In this bill, the carbon tax rate starts low at $15 per ton to ensure a smooth transition, but it increases rapidly at $10 per year to achieve greater pollution reduction. The revenue gained is equitably distributed to householders, at an estimate of $2,974 for a four-member family in year 10 of the policy. Overall, households would receive more in rebates than they pay in higher energy costs. The main appeal, however, is the reduction of US carbon emissions in half by 2035 while saving 4.5 million American lives in the next 50 years. Essentially, corporations would be forced to pay citizens for the social damages caused by industrial pollution.

The carbon dividend is a politically popular and academically supported solution. Numerous economists from all ideologies support the Climate Leadership Council’s Carbon Dividends Plan, including Treasury Secretary Janet Yellen. Polling shows a 66% topline approval to 15% disapproval for that Climate Leadership Council Dividends Plan. Unsurprisingly, the substantial dividend checks and an invigorated renewable energy job market would generate broad public support. The progressive Brookings Institute agrees that accounting for the external damage of carbon emissions through a carbon dividend would correct distortions in the marketplace, and they applaud its revenue-neutral and transparent nature. Liberals would also appreciate that, while carbon pricing is a regressive tax, the equitable lump sum dividend transfer to all adults regardless of income makes the policy a progressive tax on balance. In addition to left-wing support, the carbon dividend also appeals to the conservative desire for financial responsibility and competition with other large trade countries. First, a carbon tax would encourage rather than stifle environmental innovation. The tax increasingly makes carbon abatement less costly relative to pollution production, inducing firms to pursue clean energy technologies to evade the tax. Second, since the policy is revenue-neutral and free-market oriented, it would not expand the size or debt of the federal government. Third, via a border carbon adjustment taxing foreign importers, the carbon tariff quells the “leakage” issue that economic regulations would be circumvented by moving economic activity abroad. As a result, it implicitly forces other countries to innovate alongside domestic firms, or else they too would suffer the economic consequences of the rising carbon tariff. The policy serves as a feasible universal climate cooperation without necessitating a long, expensive, and logistically challenging international climate agreement.

It is urgent that countries adapt to global climate change before it is too late. While international agreements such as the Paris Accord and Kyoto Protocol are laudable, they are narrow in scope and intensity and their goals are difficult to enforce. Instead, governments must institute sustainable change in production and consumption habits to curb greenhouse gas emissions. There are other viable alternatives, namely an emissions standard or a cap-and-trade system, but a carbon tax system is preferable because it is simpler, less bureaucratic, has zero transaction costs, and is more adjustable to achieve desired targets of pollution quantity. A carbon dividend is the pragmatic and economically optimal solution to limit the environmental externalities of fossil fuel energy production and trade. Perhaps if every place has the foresight to decarbonize their industries as Ithaca keenly did, climate change can be halted before it becomes irreversible.