The case for a carbon tax & dividend scheme in the wake of the IPCC report

As a global issue, climate change demands global policy solutions. New research by one of our Member Organisaions, the think tank Autonomy, shows how a carbon tax and dividend system, whether at global or national scales, could not only play a major role in driving the emissions reductions necessary to mitigate climate change – but also drastically reduce global poverty levels.

The following guest blog from Autonomy delves further into the need, how this would work, and the impacts such a proposal could have. 

Putting a price on carbon

The latest report from the Intergovernmental Panel on Climate Change (IPCC), released last week, reiterated that we need an urgent reduction in worldwide carbon emissions if we are to stand a chance of avoiding climate disaster. Keeping global temperature rises below 1.5 above pre-industrial levels by 2100 – the target mandated by the Paris Agreement – means that global greenhouse gas emissions have to peak in 2025, and halve by the end of the decade.

According to the UN Secretary General, Antonio Guterres, the status quo will not come close to delivering transformation at the scale and speed required to meet these goals. In short, to hit our emissions targets, we need a more expansive policy toolkit. 

Carbon pricing is already an established idea within environmental policy making. In essence, the idea is that – to account for the negative environmental consequences of carbon emissions that otherwise get overlooked in a conventionally operating market – there ought to be a direct cost attached to carbon, managed either through emissions trading schemes or a specific carbon tax. This acts as an economic ‘stick’ to deter the production of carbon emissions, and encourage the pursuit of greener alternatives, through elevated economic costs.

Reaping the dividends

While carbon taxes in various forms already exist around the world (although often at levels far below those necessary to drive adequate behaviour change), the transformative potential of carbon dividends has been less explored. Given that the financial burden of a carbon tax is likely to fall on those on higher incomes – who tend to have a higher carbon footprint – if it’s combined with a dividend scheme, where everyone in a population receives pay-out from the funds raised, we can expect an overall redistributive effect, massively reducing levels of inequality. Funds raised from the wealthiest, highest-emitters would be transferred to the least wealthy, lowest-emitters. 

It’s not surprising, then, that a carbon tax and dividend scheme is gaining traction within economic policy, recently inspiring the largest public statement of US economists in history, which rallied 4 Former Chairs of the Federal Reserve, 28 Nobel Laureate Economists and thousands of rank-and-file colleagues behind a demand for carbon dividends. Many are recognising that tying climate policy to inclusive economic redistribution can be a crucial way of generating ‘buy-in’ for necessary reforms across the population – avoiding situations such as the Gilets Jaunes demonstrations in France in 2018.

Toll gates and money pumps

What would the economic effects of a carbon tax and dividend scheme be? Through world-first economic modelling, we outlined how the policy – if it were to grow from a national level, to wider coalitions of countries (such as the EU), all the way up to the global level – could not only play a major role in reducing carbon emissions, it would also drastically reduce global inequality and poverty.

Pulling together data on global inequalities in carbon emissions, income shares and gross per capita income, we modelled the effects of a global carbon tax set at $137 per metric ton of CO2-equivalent – the current rate in Sweden, and the highest in the world – if it were then redistributed as a global dividend.

A global scheme like this would be transformative. In total, $2.69tn would be raised annually and, distributed evenly, would see countries in South America, Sub-Saharan Africa, South-Asia, and many other parts of the Global South benefit immensely, while most developed economies would still only see proportionally relatively small losses. 

It would also, we found, effectively end extreme poverty, understood as $1.90 per person per day. Those that would gain most are the poorest of the global poor, living in countries such as Benin, Zimbabwe and the Central African Republic - the latter of whom would see their relative income increase over 7000%.

Another 371m people would be lifted above the national poverty line typically found in lower middle income countries ($3.2 a day) and 820m would be lifted above the poverty line typically found in upper middle-income countries ($5.5 a day). In total, a carbon dividend scheme would protect 636m people from falling below the international extreme poverty line through the payment alone, showing the potential for the policy to establish a global ‘safety net’.

Emerging economies like Brazil and India would benefit from a global carbon dividend receiving 37bn (1.9% of GDP) and $696bn (24% of GDP) respectively. Most significantly, however, the redistributional effects would be most concentrated in the large poor populations of both countries. In Brazil, for instance, only the top 10% of the population would end up as net contributors, while the bottom half of society would see their incomes increase by over 30% on average.

We also looked at the effects of carbon tax and dividend schemes taking place solely at the national level, in Brazil, the UK and Germany. These are policies which could be much more readily implemented tomorrow by their respective governments – but, even at this scale, they still had significant effects on economic inequality.

In the UK and Germany, for instance, national carbon dividends schemes would benefit 70% of the respective populations, who would receive net contributions from the top 30% - with the majority of money coming from the richest 1%. 

Tying economic justice to climate justice

We urgently need to reduce global carbon emissions – but our research has shown that, through instruments like a carbon tax and dividend scheme, this should be seen as an immense opportunity to push forward global economic justice. With the support of the Subak accelerator, we’re looking forward to building our capacity to pull together further novel datasets to help build the analytic capacities we need to support global, just, green transitions.

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Read more about Autonomy’s work on their website.