How to save the world while making people better off

Carbon dividend, explained

Hi, it’s Lisa! I’m responsible for design & blogging at Datawrapper. Recently, I’ve tried to understand the idea of the “Carbon Fee & Dividend” better – basically, a carbon tax that shares its revenue equally among the population. I’ll explain the concept here with a few of our tables:

Carbon emissions are bad for the climate, so let’s get rid of them. But how? One idea is the carbon tax: It’s a “price” for each ton of CO2 a country consumes. Let’s assume we start taxing each ton CO2 with 50 Euro. When you go to the shop tomorrow and buy stuff that accounts for 1 ton of CO2 (e.g. 440 liters of gasoline), you’ll pay 50 Euro more for it on the counter. The hope is that this makes you buy less of that stuff in the first place.

Each German accounts on average for 9.7 tons of CO2 per year. (Let’s round this up to 10 tons.) If you buy products that emit exactly these 10 tons CO2, you’ll pay 500 Euro per year more thanks to the carbon tax.

That’s a lot. That’s especially a lot for people with less income than you probably have. And that’s why smart people had the idea that the government doesn’t keep the tax revenues, but that it transfers the 500 Euro back to you. It’s called a “carbon dividend” (a dividend is money a company pays to its shareholders out of its profits). Let’s do the math again for the whole country:

Equalizing society

The carbon tax in combination with the dividend does a lot of things: CO2-intense products become expensive, so yes, it sets an incentive to look for an alternative (public transport instead of the car).

But the carbon dividend is also a good equalizer: If your income is low, you spend less money in general, and therefore less money on carbon-intense products (there’s a reason why developing countries have low CO2 emissions per capita). When you account for 6 tonnes of CO2 while everyone else accounts for 10, you’ll spend just 300 Euro more on products in a year…but the government will still give you your dividend of 500 Euro. A win of 200 Euros!

And that 200 Euro means a lot to you when you have a small income. 200 Euro feels like a 1% raise to you when you earn 20k, but it only makes a fifth of the difference when you earn five times as much.

So the carbon dividend favors the ones with less income, in absolute and relative terms. “According to the US Treasury Department, the bottom 70 percent of Americans would receive more in dividends than they would pay in increased energy prices,” self-called policy entrepreneur Ted Halstead explains in his TED talk about the carbon dividend. “That means 223 million Americans would win economically from solving climate change.”[1]

That’s the idea: Rich people pay the carbon tax to buy rich-people-stuff, and the tax revenue flows to low-income families.

A tax that wants to get rid of itself

Carbon dividends are systems that influence themselves: How much dividend the government transfers to you, depends on how much carbon taxes it collects. And that depends on how much money we all spend on CO2-intense products. And that depends on how much these products cost. And they cost more because of the carbon tax.

So the goal of the carbon tax is to lower CO2 emissions, and therefore to lower the carbon tax revenue, and therefore to lower the dividend.

And there’s so much potential to lower these emissions. Individuals in the UK don’t live much more “environment-thoughtful” than Germans, and still, emit 3.9 tonnes CO2 less than Germans do.

And Germans, Americans, Brits – almost all countries decreased their CO2 emissions already, through innovations and regulations:

There’s lots this article doesn’t talk about: Like the question if we should tax CO2 emissions or CO2 equivalents (and what they are in the first place). Or what impact yearly increasing carbon taxes have on the dividends. Or how the process of taxing works exactly. Or how we’d deal with imports and exports. If you’re interested in learning more, I can recommend Ted Halstead’s TED talk and the FAQs on the website of the Carbon Tax Center. See you next week!

  1. The source for this statement is the last page of the working paper “Methodology for Analyzing a Carbon Tax” (PDF) by the Office of Tax Analysis, published in 2017. However, a paper by the Citizens’ Climate Lobby – also advocating for the carbon dividend – assumes that 53% of US families and 58% of individuals would gain, not 70%.

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