Today, our friends at the New America Foundation published a new paper by Ted Halstead on carbon pricing, Unlocking the Climate Puzzle. In it, Halstead tackles one of the toughest political question facing advocates of carbon pricing, which is: how to create sufficient and stable political support for carbon prices?
The psychological and cognitive tendencies that oppose climate action are well known—even among those inclined to believe that climate risk warrants action. For individual actors, climate risk is remote, diffuse and forward in time. Meanwhile, the costs of reducing emissions are personal and immediate. This creates a perfect storm for inaction, which is made worse by the tendency for “loss aversion,” an idea promoted by Daniel Kahneman that people prefer minimizing losses (avoiding carbon taxes) to accruing benefits (avoiding climate damages).
That same principle is behind Roger Pielke Jr.’s Iron Law of Climate Policy, that climate policies that require public sacrifice (read reduced access to underpriced fossil energy) and limit economic growth are doomed to failure. That strain of thought has led a group of climate action advocates—and conservatives who deign to undermine climate science but would rather avoid new taxes—to reject meaningful carbon prices and favor low-cost measures, like clean energy R&D, which they hope will lead to endogenous shifts to clean energy.
But the scale of climate risk requires emissions reductions—and big ones—immediately. Adopting the 2 °C target of the UNFCCC gives a carbon budget equal to about 20 years at today’s emissions levels. Assuming emissions growth in the booming economies of the developing world means reductions in countries like the United States are imperative.
Carbon prices can accomplish such reductions, but they need to be large and stable enough to affect investment decisions being made in the short term. Halstead lays out the political challenge neatly:
- Climate risk compels large percentage reductions in greenhouse gas emissions, which could be achieved most efficiently by a meaningful and continuously increasing carbon price.
- Such a carbon price will have direct and immediate costs, offset by diffuse benefits in the future.
So how should climate pricing advocates move forward?
Halstead argues for a carbon tax with revenues returned as individual dividends (a plan not altogether distinct from that of Citizen’s Climate Lobby). Such a plan could meet the conservative goal of revenue neutrality and likely outpace the emissions reductions allowed by regulatory action and therefore lead to regulatory reform. Halstead is launching an organization to advocate for carbon tax-and-dividend schemes internationally.
The key to Halstead’s political argument is that such a rebate will engender political support by making climate action of increasing ambition a win in the view of the public. And, in Halstead’s view, this is the political crux.
“The most revolutionary aspect of this idea is its ability to tackle Kahneman’s loss aversion theory head on by putting money directly in the hands of all adult citizens, with the amount growing in direct proportion to increases in the carbon tax rate. This fundamentally alters the cost-benefit time horizon of climate mitigation, conferring benefits in the here and now.”
Halstead goes into detail of how the “here and now” argument applies in developing as well as developed countries and deals with the psychological barriers that make climate action a not particularly urgent issue for people and political actors.
The paper in its entirety is worth a read. Halstead’s argument for the political power of carbon dividends is compelling. Even if it does not convince, it should help other carbon pricing advocates as they seek to generate political inertia.
Of course, there are strong arguments that favor other uses of carbon tax revenue, but it is not clear that they enjoy the same political benefits. Corporate and payroll taxes are more pro-growth in a macro-economic sense, but the atmosphere will not wait for comprehensive tax reform. Likewise, funding energy R&D or compensating dying coal communities, which both may be politically necessary in any final carbon tax legislation, are achievable by other means.
Kudos to Mr. Halstead and welcome (back) to the show.