Carbon Taxes with Universal Dividends

In 2009 a vigorous debate is taking place at the state, national and international level about the best way to reduce carbon emissions.  Currently there are two leading proposals.  One is a carbon cap with emission permits auctioned off and the money generated returned to Americans on a per capita basis.  Peter Barnes, the designer of the policy, calls it cap and dividend.  More information can be found at  Another is a revenue neutral carbon tax where the money raised is used to reduce other taxes or returned in the form of dividends on a per capita basis. More information can be found at the Carbon Tax Center.

A universal dividend makes a carbon cap ethical, equitable and politically effective.

Ethical – If the sky is owned by all humanity equally, then any value created from carbon caps should be distributed in equal amounts to everyone.

Equitable – A cap on carbon will raise the price of energy and energy intensive goods and services. A universal dividend will especially help low and middle income households absorb and manage those cost increases. Indeed, lower income households, on average, should receive back more in dividends than they pay in higher prices for fuels and products.

Politically Effective – Per capita dividends will enhance public acceptance of a carbon cap by largely or completely offsetting the negative economic impacts on tens of millions of households. In the early years of the cap, the price of carbon (along with energy and most consumer products) will increase as we establish a market price that will encourage supplies and manufacturers to substitute existing energy sources for low carbon fuels. But since the dividends rise as the value of carbon rises, the net impact on most households will be small.

In the mid 1990s a bill that contained several of the key elements of the current leading policies was designed by ILSR and debated in the Minnesota legislature.  The bill would have imposes a carbon tax equivalent to $50 per ton with the money returned via a tax shift or as a per capita dividend.  In preparation for the debate ILSR conducted a number of studies about the policy’s impact on various sectors of the Minnesota economy, including energy intensive business, agriculture, low income households and small businesses.

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