Wednesday, February 15, 2017


Adam Whitmore argues in his recent blog “How not to squander $ 130 trillion” that carbon pricing should be used to establish wealth funds from which current and future citizens can benefit.  This is very timely given the Baker and Shultz (Republicans) proposals now under discussion in the US.  He makes the classic environmental economics arguments for carbon pricing.

At the moment only a very small proportion of greenhouse gas emissions is priced adequately.  Most emissions remain unpriced, and the growing proportion that is priced is mostly sold at well below both the cost of damages, and well below the value of an increasingly scarce resource.  A valuable scarce resource is thus being given away or sold below cost, subsidising emitters.  Huge natural wealth is being squandered.  And once gone it can never be replaced.

It would be better to use revenue from carbon pricing to create a wealth fund to benefit both current and future generations …

… in the form of a fund for citizens, with proceeds from carbon pricing (the sale of allowances or taxes) at adequate levels paid into the fund.  Carbon pricing should be comprehensive, with prices at adequate levels.  The finite volume of the resource implies it is best used to establish a wealth fund, where financial capital is built as natural capital is used up.  The fund would belong to all citizens.  Granting its value to citizens would surely encourage better management of the atmosphere, and thus the climate, and higher carbon prices than generally prevail at present.

Most environmentally concerned economists will support the arguments for much higher prices to attach to greenhouse gas emissions (GHG), and it is well worth examining some of these ideas further. Adam develops the basic idea and sets out his vision for how it might work.

Dividends from the fund could be used in many ways.  One approach with a range of advantages is distributing benefits to all in the form of a “citizen’s dividend”.  There is already a feature of the Alaskan wealth fund derived from oil revenues, where distribution is in the form of a Permanent Fund Dividend to all citizens.  This is widely considered to have helped build and maintain public support for the scheme.

This approach is closely related to the idea of “tax and dividend” carbon pricing.  I have previously argued that such approaches have merit, and indeed tax and dividend has recently been advocated by senior Republicans in the USA.  However, there is an important difference between a fund and tax and dividend as often presented, in that revenues are used to establish a fund that is intended to be permanent, whereas tax and dividend proposals often assume revenues to be distributed in full.

Adam also links his idea to other political objectives especially in the context of redistributive measures, both nationally and in a global context.

There is also a relationship between the idea of a citizen’s dividend and a universal basic income, which is much discussed at the moment and subject to a few trials.  … There is a natural case for distributing dividends equally, as all have equal rights to the atmosphere.  The atmosphere is a global resource, and climate change knows no borders, so it is natural to make any fund global.  However establishing such an arrangement is likely to be too great a political challenge. …

The global challenge is clear enough. And the idea of developed countries (sometimes deemed to have a historic responsibility in this context) subscribing to development funds to assist developing countries in both low carbon initiatives and in adapting to climate change, is already part of the currency of international climate negotiations.

Establishing national funds will have many challenges.  However the prize seems large enough to be worth pursuing.  The current system of simply allowing emissions to be dumped into the atmosphere, often free of charge and almost always too cheaply, is a waste of a unique and irreplaceable asset.  Irreplaceable natural wealth such as the atmosphere should be managed carefully, not squandered recklessly.

This amounts to a series of challenging propositions. It is intuitively appealing, and the connection of ideas in providing for the future, taxing emissions to correct a market failure, and providing for a “fair” allocation of proceeds is attractive.

However it will be necessary to explore the idea in the context of potential macro-economic and other implications, and we can expect quite a lot of exposure for these ideas in the near future, not least reflecting their surprising emergence from US Republicans. A few of the questions deserving consideration, and to which we may return in future blogs, are:

1  There are some clear differences from the sovereign wealth funds put in place to preserve the long term position of countries that are depleting a scarce natural resource eg Norway and oil. One feature of the latter is that they can prevent a potentially dangerous exchange rate appreciation which destroys part of the country’s economy. UK failure to establish a wealth fund for North Sea oil was one of the factors that undermined UK manufacturing in the 1980s. But this feature does not translate to a global context, nor, would it necessarily make sense for an individual country to set up such a fund in isolation.

[Economists will also note that oil is a “private” good, whereas the GHG absorbing capacity of the planet is very much part of the “global commons”.]

2  Would the creation of such a fund immediately remove purchasing power from the economy and, in the absence of offsetting measures, provoke recession? One can imagine, for example, some very negative effects from the immediate adoption of such a measure in the German and eurozone economy for example.

3  Is it not simpler to view the proposal simply in the context of additional sources of tax revenue, Green taxes, which would increasingly substitute for other and unpopular forms of taxation? Or should the revenues be hypothecated to other clearly needed climate policies, for example on research and development?

4  Energy taxes are often seen as quite regressive. How could this be remedied?

My own view is that this is a welcome and timely proposal and it, perhaps in a modified form, could be used as a welcome rallying point for more effective action on climate; but we will need to think hard about its practical and political aspects. As ever the devil will be in the detail. But it will also be in the packaging and the presentation.

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