The case for a Climate Income

Photo by Chiara Daneluzzi on Unsplash

The toolbox for rapid GHG emission reductions

Humanity is on a “race to zero”, a mission of historic significance to reach netzero CO2 emissions before 2050, followed by negative CO2 emissions (as well as netzero levels for other greenhouse gas emissions) shortly thereafter. Considering that global emissions have not peaked yet but are still projected to continue to increase in the near future, it is apparent that winning the “race to zero” requires a rapid and deep decarbonization at a much faster pace than is currently the case. In order to accelerate the speed at which decarbonization occurs (both domestically as well as internationally) governments must take full advantage of a toolbox that comprises a variety of transformative climate policies, including (but not limited to):

Economic incentives/disincentives

• Putting a price on GHG emissions, as suggested by Citizens’ Climate Lobby and many leading US economists. A well written argument in favor of carbon pricing in general has recently been provided by Max Roser. Ideally carbon pricing serving as a disincentive for climate-negative activities (“stick”) is combined with a carbon pricing that serves as an incentive for climate-positive activities (“carrot”), like the Global Carbon Reward suggested by Delton Chen, for example.
• Shifting direct subsidies from fossil fuels towards climate solutions, as suggested by the Center for American Progress, for example

Regulation, rules and norms

• Establishing forceful sustainable stewardship duties and liabilities for company directors, e.g. based on Robert Hinkley’s Code for Corporate Citizenship and/or the recently proposed legal definition of “ecocide”, granting legal standing to nature/animals.
• Transformative green financial market regulation, as suggested by The Great Democracy Initiative, for example
• Mandated standards, phase-outs, retirements, or end-of-life replacements of climate-negative products and services, ideally enabled by publicly supported financing schemes addressing the industrial supply side as well as the end-consumer demand side (the latter being emphasized by Saul Griffith)

Further enabling measures

• A mission-driven green fiscal stimulus for accelerated decarbonization investments as suggested by Mariana Mazzucato et al, or Noam Chomsky and Robert Pollin, for example
• A just transition funding to provide structural support to communities and regions dependent on fossil fuels
• Increased green development cooperation funding to accelerate decarbonization in developing economies, as suggested by the OECD, for example

The case for GHG emissions pricing

In particular, the proper pricing of GHG emissions represents a critical cornerstone of a comprehensive climate policy package. The on-going market failure with regard to the pricing of climate catastrophe has been well established. As a result, economic profits and financial returns of fossil fuel-related projects are allowed to be far too high to safeguard the well-being of young & future generations. Likewise, various climate mitigation activities still offer insufficient levels of economic profitability and financial return to attract capital allocations. The obvious remedy is that economic costs are increased for those activities that society deems undesirable, while economic value is increased for those activities that are deemed desirable — especially when markets fail to properly take the costs and benefits resulting from these activities into account. Both, additional costs for GHG emission-intensive goods and services and additional revenues for GHG emissions-reducing goods and services improve the relative competitiveness of climate solutions. If designed and implemented well, GHG emission pricing by itself has the potential to substantially accelerate the speed at which market forces are driving the deployment of existing climate solutions as well as the development of new ones.

The strength of the economic incentives and disincentives provided by GHG emissions pricing depends on its scope, its price level and its growth trajectory. The “Network for Greening the Financial System” (NGFS), for example, assumes for its “orderly transition scenario” an average global price level of 50 USD/ton by 2030 increasing to 200 USD/ton by 2050. Concerns about international competitive disadvantages and carbon leakage driven by emissions pricing can be effectively addressed by a well-designed carbon border adjustment mechanism (CBAM). As more countries/regions establish ambitious GHG emissions pricing schemes in order to avoid border tariffs and generate carbon-pricing revenues for themselves instead, the need for a CBAM declines over time.

Of course, emission pricing alone likely won’t suffice to meet the goals of the Paris Agreement. Thanks to extraordinary technological improvements, renewable energy generation has become substantially more competitive over the past few years, for instance. But without a correction of the aforementioned market failure, the pace of decarbonization will likely remain too slow, as the “production gap report” by UNEP illustrates. At this late stage, after having essentially lost 30 years, an “all-at-once” approach is needed, utilizing the full potential of the climate policy toolbox to maximize the chances for successfully stabilizing global temperatures at a sustainable level.

The potential benefits are huge: For example, the IMF has projected a 13% increase of global GDP by the end of this century relative to “business as usual” for a policy package that combines GHG emissions pricing with a green fiscal stimulus. In addition, there are substantial co-benefits in terms of improved air quality and human health, avoided biodiversity losses, and long-term price stability to be expected.

Arguments in favor of using GHG emissions pricing revenues for a climate income

Without sufficient public support, any climate policy is bound to fail. As the example of the Yellow Vest Protests 2018 in France demonstrates, there is a substantial risk of a public backlash if demands for a just transition are being neglected. While this is less of a problem for a monetary policy-based incentive scheme like the Global Carbon Reward, in particular a GHG emissions pricing that serves as a revenue-generating disincentive by increasing prices for fossil fuels and other GHG emissions-intensive goods and services are putting consumer households under increasing economic pressure represents a political challenge that must be addressed. How can the public support for rising GHG emissions prices be ensured and sustained in this case? The answer is simple and provided by the concept of a Climate Income (also known as a “carbon dividend”): A major share (or even all) of the revenues generated by GHG emissions pricing could be equally distributed to consumer households in order to increase their capacity to absorb price increases and enable them reduce their carbon footprints over time. After all, higher upfront purchase prices and investment requirements often represent a key obstacle to the take-up of low-carbon technologies.

Moreover, a Climate Income would create a powerful incentive to adjust consumption patterns and benefit from an even greater share of extra income. Assuming 100% of GHG emissions pricing revenues are distributed, about two thirds of all households — especially low-income households — whose climate footprints tend to be significantly lower in comparison to high-income households — could even gain more than they would “lose” to price increases. The Tax Foundation has simulated the positive distributional effects of a “carbon tax and dividend” scheme starting at 50 USD/ton and increasing by (a rather modest) 5% p.a. in the US:

(Slightly modified)

The administrative burden for a climate income would be relatively small, especially when already existing systems with sufficient reach (e.g. health insurance, income tax) can serve as a backbone. The remaining “unbanked” could be reached by state-issued prepaid debit cards or other targeted welfare programs, for example. In addition, the equivalent of monthly checks to all citizens — ideally paid upfront — would make the government’s consideration for the needs of their citizens tangible and transparent, thereby enhancing political trust. It would also be difficult for newly elected administrations to reverse the Climate Income legislation. In fact, the implementation of a Climate Income could send a powerful positive message that is largely immune against populist attacks, such as: “No one should be left behind. Together we can rise up against the greatest challenge of our time”. Further supporting this point, a Climate Income would be revenue-neutral — neither would it increase the size of the state nor would it give a reason for public mistrust (whether justified or not) in the effectiveness and consistency of other possible uses for emission-pricing revenues described in the next section.

Other possible uses of GHG emission pricing revenues

Besides a Climate Income other possible uses for emission pricing revenues include:

• Payroll tax cuts: Supporting companies through reductions of payroll taxes, e.g. by substituting former payroll tax revenues with emission pricing revenues
• Mission-driven green fiscal stimulus: Public investments dedicated to accelerating (domestic) decarbonization activities (green innovation, job market development, infrastructure modernization, etc)
• Just transition funding: structural support funding for regions dependent on the fossil fuel industry
• Green transition development cooperation funding: Provision of additional development cooperation funding dedicated to support decarbonization activities in developing countries
• Public debt service: Reduction of public deficits

A comparative analysis reveals that the case in favor of a Climate Income is overwhelming: None of the other uses of GHG emissions pricing revenues can ensure a broad and continued public support in the face of steadily increasing fossil fuel prices. One might think that the Climate Income may enable consumers to keep their current habits and that revenues might be better spend on other areas where green public spending is needed. However, once the increased relative price competitiveness of low carbon solutions and the need for the political acceptance of steep carbon price increases is factored in, it becomes clear that there is no way around a Climate Income - at least for a transitional period until consumption patterns and markets had time to adjust. While it is evident that a mission-driven green fiscal stimulus, a just transition funding and green development cooperation funding represent critical enabling measures, alternative sources for green infrastructure spending can be utilized, especially when considering the substantial room to maneuver for central banks. In this light, the use of GHG emission pricing revenues to reduce public debt at a moment when transformatinal public investments are most urgently needed, appears to be among the worst possible uses of carbon pricing revenue: Given that the economic burden of the climate crisis far exceeds the economic burden of public debt, it is difficult to imagine how a failure to mobilize sufficient funding for the long-term benefit of young and future generations could be justified. In conclusion, a Climate Income represents a necessary use of GHG emission pricing revenues that can ensure the socially just and Paris-Aligned transition that the world depends on right now.