Monday, February 20, 2017


Adam has responded to some of the questions I raised in my recent blog reporting on his proposal for a carbon wealth fund.

John raises some interesting questions in relation to my proposal for a carbon wealth fund.  I will try to answer them briefly here.  I will assume that national funds are the only practical way forward in the short to medium term, and look at a UK sovereign wealth fund based on carbon revenue. 

Use of a global public good

First, John notes that there are some differences between conventional resources, such as oil and gas, held by nations, and the atmosphere, a global public good[1].  The distribution of a global public good will inevitably be contentious.  However existing carbon pricing regimes or simply emitting free of charge already use up a global public good.  Giving citizens and governments a greater stake in increased carbon prices is likely to decrease the quantity of emissions, and so the proportion of the global commons used[2].  This makes the approach I have proposed more compatible with good stewardship of the global commons than existing arrangements, at least for the next 50 years until revenues start to decline. 

Macro-economic effects

John also raises the issue of the macro-economic effects on exchange rates and economic activity.  However these effects would probably not be large.  The payment into a UK fund would be around £16 billion p.a. at present, a little under 1% of GDP per annum[3].  This would be unlikely to cause major economic dislocation, especially if phased in over a period of perhaps 5 years.  The fund would grow large over time, reaching around £860 billion by the end of the century[4].  However this is not vastly larger than the Norwegian fund today, which is for a very much smaller economy.  Furthermore any fund would have the effect of redirecting revenue from consumption to investment, which would probably have a positive macroeconomic effect in the context of historic UK underinvestment. 

Would it be regressive?

Then there is the question of whether increasing revenue from carbon pricing would be socially regressive.  The concern here is that poorer households spend a larger proportion of their income on energy than richer households, and so energy taxes tend to hit them disproportionately harder.  However poor households still spend less on energy, and therefore carbon, in absolute terms than richer households, so an equal dividend, as I’ve proposed, would have the potential to have net progressive effect.   Furthermore, households account for only a minority of energy use, but would get the full benefit of dividends (or at least a large proportion), increasing the extent to which it is progressive.

However there are some important intergenerational issues to consider.   The proposal for a fund takes the view that present generations should safeguard capital assets so they retain value to future generations.  This is in line with the standard definition of sustainable development[5].  However there are distributional issues here which need to be addressed.  Some present citizens will be worse off. 

Use of green taxes

The proposal is clearly consistent with using green taxes more widely as a policy instrument.  What’s different from the standard approach to green taxes is the suggestion of placing revenue in capital fund rather than using revenue to fund current expenditure.  The landfill tax to which I referred in my original post currently raises around a billion pounds per annum[6].  It would be natural to add this revenue to a UK wealth fund. 

Other uses of funds

Finally, there is no reason some of dividends from the fund should not be used to fund things like R&D.  As I have previously discussed there are many legitimate calls on revenue from carbon pricing.  However there are many compelling arguments for allocation direct to citizens, and this should in my view be a priority for the fund. 

There are also other issues to consider, such as governance structures.  Many of these have been reviewed in the wider literature on sovereign wealth funds[7].  Doubtless much work is needed to elaborate on these details, as would be the case for any new institution.  However the prize is worth the effort.

I very much welcome John raising these questions.  They are exactly the sort of issues that need to be discussed, and I hope the debate will not stop here.

Adam Whitmore - 20th February 2017

[1] There is an interesting question as to whether countries should have full property rights to natural resources within their territories, as is often assumed at present, but this is too large a subject to go into here.
[2] The assumption here is that increasing prices from current low levels will increase revenue.  Carbon prices would increase by a factor of say five or more in many cases, and it is unlikely that emissions would decrease by an equal factor – though if they did it would be very good news.
[3] This assumes 400 million tonnes of emissions are priced, compared with 2015 totals of 404 million for CO2 and 496 total greenhouse gases (source BEIS), implying a high proportion of emissions are priced.  Carbon price is assumed to be £40/tonne, roughly the Social Cost of Carbon at current exchange rates and well above current levels.  This would give total revenue of £16 billion in the first year, less than 1% of UK GDP of approximately £1870 billion in 2015. (source: )
[4] Assuming that the UK reduces its emissions in line with the Climate Change Act target of an 80% reduction from 1990 levels by 2050, and then to zero by the end of the century, and that 80% of emissions are priced at the Social Cost of Carbon as estimated by the US EPA, converted at current exchange rates of $1.25/£.

[5] Sustainable development is usually characterised as meeting the needs of present generations, without compromising the ability of future generations to meet their own needs.

[7] See here for a specific proposal for a UK wealth fund:  and Cummine (2016) cited in my original post for further details.

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