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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