A Carbon Tax That Pays Dividends

Taxing carbon might be the world’s best and last hope to prevent the ecological devastation of climate change. Unfortunately, studies show that carbon taxes make wealth inequality worse by placing an unfair burden on poor people. But a new carbon tax model suggests a way to sidestep the inherently regressive nature of carbon taxes by giving carbon tax revenue back to people that actually need it.

In their recent paper for People’s Policy Project, economists Mark Paul and Anders Fremstad suggest a carbon tax and dividend system would decrease the United States’ emissions while also putting money in the pockets of all Americans, including the middle and lower class people who’d benefit from it the most.

“It actually turns a regressive tax into a progressive tax,” Paul says. “Which means we’re protecting the most vulnerable households while still fighting climate change.”

Carbon taxes are inherently regressive. When you raise the cost of fuel by adding a carbon tax, there’s a ripple effect. More expensive fuel increases the prices of goods across the board. Higher costs for food and other items necessary for survival hits poor people far harder than rich people.

Paul and Fremstad’s proposal would have richer people paying more carbon taxes that poorer people. It also includes a universal dividend would pool carbon tax revenue and pay out an average of more than $2,200 per person annually. They believe that pay-out would help middle- and lower-income Americans offset unavoidable price increases on things like gas and electricity while incentivizing big carbon users to alter their habits.

“We need to change the price of carbon to incentivize people to reduce their consumption of fossil fuels,” Paul says.

The question about carbon taxes has always been how the revenue would be spent. Conservatives argue the money should be given back to corporations, who would use it to create more jobs. Many on the left argue it should be used to help fund a Green New Deal—an economic stimulus package centered around environmentally-conscious programs. While he supports the idea of a Green New Deal, Paul believes using carbon tax revenue would be misguided.

“The idea here is that we can fight climate change and economic inequality at the same time while finding other sources of revenue to fund programs like a Green New Deal,” Paul says. “We know that investing in the future will have broad payoffs, anyway.”

The United States is one of the only large, industrialized nations on earth without a national carbon tax. States can impose their own, but so far only California, Colorado, Maryland and Washington have. Those four aren’t nearly enough to self-regulate industry or alter carbon consumption. Economists on both sides of the political aisle have argued in favor of carbon taxes, most notably conservative Greg Mankiw. But as Fremstad sees it, none of the proposals have taxed carbon highly enough—or suggested a payout system designed to fight economic inequality.

“A lot of economists have convinced themselves that we should do something about climate change, but that we shouldn’t do too much,” Fremstad says. “They’ve pushed carbon taxes that are way, way too low to meaningfully reduce our emissions.”

Paul and Fremstad conclude that taxing $230 per ton of CO2 will help the U.S. meet its emissions goals by incentivizing less fossil fuel consumption. And because it would, in theory, self-regulate business without imposing harsh restrictions, it should appeal to the right as well.

“By taxing carbon, we’re actually forcing people to pay the social cost of what their actions create,” Fremstad says. “I think when you understand that, it makes the policy a lot more salient.”