Carbon Permits: Paine’s Social Dividend

If Thomas Paine could see his beloved United States today, he would be appalled, bewildered, and perhaps gratified as well.

Especially gratifying, no doubt, would be the recognition that his brainchild of 1797 – a trust fund that would distribute dividends to all, out of wealth derived from the commons — is finally gaining traction.

Alaska’s prototype, the Permanent Fund Dividend (PFD), which has been distributing dividends to residents from invested oil revenues since 1982, is going strong.

Entrepreneur Peter Barnes, who has been pounding the pavement for a U.S. social dividend since 2001, has released a new book, With Liberty and Dividends for All.

This book’s publicity materials remind us that the dividend concept, as applied in Alaska, enjoys the support of figures across the political spectrum, from Bill O’Reilly and Sarah Palin to Robert Reich and Van Jones.

Editorials and op-eds in major newspapers have endorsed dividend schemes. Legislation has been introduced to the U.S. Congress. Academic economists have begun to publish books analyzing the successes of the Alaskan PFD and studying how that model could be applied in other contexts.

North of the border, British Columbia quietly implemented a version of the dividend in 2008 and it is working just fine, thank you.

The social dividend clicks with climate change

Why the surge of interest? What has happened is that the social dividend has become relevant to climate change. Barnes was the first to make the connection.

Arable land and mineral reserves are not the only finite resources that properly belong to all of us in common. So is the atmosphere, as a sink for our wastes – most notably, the carbon dioxide and other greenhouse gases that are driving global warming.

If the atmosphere can only absorb so much carbon dioxide before dangerous levels are reached, every ton of carbon I emit deprives my neighbors of the opportunity to emit carbon of their own. Thus, I owe them some compensation. Hence, the concept of cap-and-dividend.

Unlike cap and trade, where polluters buy and sell permits to emit carbon, here polluters – technically, the energy companies that introduce the carbon into the economy – purchase, at auction, permits sufficient to cover the carbon dioxide equivalent in their product. The money raised in this fashion is then distributed equitably to all households.

Here, distributing dividends to households represents not only a right, as we are all trustees of the sky as a pollution-sink commons, it is also a matter of sensible policy.

Energy producers will pass the costs of carbon permits on to consumers in the form of higher prices for gasoline, electricity, and home heat. Those higher prices will put a significant financial burden on households. Diverting the permit revenue to households will make the higher energy prices affordable.

Cap-and-dividend: A triple win

The net result of a “cap-and-dividend” approach would thus be win-win-win. Carbon emissions could be limited to levels deemed safe. (In the most likely scenario, the cap would be progressively lowered from year to year, to give the market time to respond and scale up alternative energy sources and technologies.)

Higher energy prices, imposed by the energy companies to pay for the permits, would give consumers the right signals to economize on energy consumption and invest in energy efficiency.

Dividends to individual consumers would make the higher prices affordable. In fact, the most energy-efficient consumers will see savings. And all this is achieved with no net increase in government spending.

There are, in fact, three programs already in place that could be taken as models.

The British Columbian social dividend is implemented via the tax code. As the provincial government receives revenue from a modest fuel tax, other personal and business taxes are reduced or rebated.

Six years into the program, British Columbia has the lowest personal and business tax rates of all the Canadian provinces and its consumption of fossil fuels had declined by 16%. Meanwhile, the province beat the rest of Canada in GDP growth per capita.

In California, utility customers are receiving dividends in the form of utility rebates. Starting in 2014, the state has required utilities to issue rebates to customers out of the income that the utilities receive from sale of permits under California’s cap-and-trade program.

The third example, most ambitious of all, is also most unusual. It is not motivated by climate concerns at all. And it is located in, of all places, Iran.

Learning from Iran

For decades, Iran shared the benefit of its oil revenues with its citizens by means of artificially low fuel prices. In 2010, when Iran needed to phase out the fuel subsidies, it eased the transition by initiating a program of paying subsidies directly to households instead.

A universal dividend scheme was seen as more expedient than trying to target the poorest 70% of households that would be hit hardest by the higher fuel prices. This was policy made on the fly – the government asked citizens to voluntarily provide bank account numbers to facilitate payments.

At the time the subsidies began, 80% of the population had complied. Within a few months, 96% of households were receiving the subsidy.

If Iran can pull this off, there is no reason why the U.S. or any other developed nation could not. And there are organizations in the United States working to make it happen.