The “Economists’ Statement on Carbon Dividends”

Last week, a number of prominent economists released a signed statement regarding policy approaches to potential climate change. Later it was opened for others to sign. I’ve pasted it below, and commented below that.

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

I. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.

II. A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

III. A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long- term investment in clean-energy alternatives.

IV. To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing.

V. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

George Akerlof, Robert Aumann, Angus Deaton, Peter Diamond, Robert Engle, Eugene Fama, Lars Peter Hansen, Oliver Hart, Bengt Holmström, Daniel Kahneman, Finn Kydland, Robert Lucas, Eric Maskin, Daniel McFadden, Robert Merton, Roger Myerson, Edmund Phelps, Alvin Roth, Thomas Sargent, Myron Scholes, Amartya Sen, William Sharpe, Robert Shiller, Christopher Sims, Robert Solow, Michael Spence and Richard Thaler are recipients of the Nobel Memorial Prize in Economic Sciences.

Paul Volcker is a former Federal Reserve chairman.

Martin Baily, Michael Boskin, Martin Feldstein, Jason Furman, Austan Goolsbee, Glenn Hubbard, Alan Krueger, Edward Lazear, N. Gregory Mankiw, Christina Romer, Harvey Rosen and Laura Tyson are former chairmen of the president’s Council of Economic Advisers.

Ben Bernanke, Alan Greenspan and Janet Yellen have chaired both the Fed and the Council of Economic Advisers.

George Shultz and Lawrence Summers are former Treasury secretaries.

Here’s my thoughts:

• The first sentence isn’t necessary, and may not even be true as it’s written (e.g., what if “immediate national action” has zero effect?). But it’s close to what many people believe, so it’s OK.
• Point I is OK as written.
• I worry about Point II, if only because “emissions reductions goals” appear to be awfully flexible in practice. If they were relatively fixed, I would not see a problem ramping up to them.
• Point III is huge, and a message that must be gotten across to those inclined towards control issues.
• Point IV is interesting, and new (to me). It sounds kind of Trump-y, but it might get at some of the issues with China’s pollution if their largest trading partner kept dinging them for their pollution.
• Point V has gotten some adverse attention in the legacy media (see the note below). I like the lump-sum idea, since marginal tax changes are distortionary. I do think it is overly optimistic that there’s some inequality here: to me it seems presumptuous to think that most people’s marginal use of carbon on which they pay is going to be less than the average use on which the rebate is based. It seems to me that many rich people might be able to turn that to their advantage, and many poor people might be unable to make it work in their situation. But, it’s a better idea than most.

A thing that an economics student should definitely pay attention to is the political mix of the economists who were the original signatories. These are not just Democrats or just Republicans. It’s a good mix, which should probably indicate that they’re in agreement on one thing: the policy “solutions” produced by elected officials and bureaucrats could be a lot worse than this one.

N.B. A problem with all of this is that the optimal carbon tax for warming abatement was shown, under reasonable assumptions (and quite a while ago) to be in the range of 30 cents per gallon. There’s a couple of problems with that. First, it’s already less than the tax on gas in most locations in the U.S.: so “immediate national action” in the first bullet point may be a lot more about de-prioritizing things government is already doing, rather than bringing in new funds. Second, people whose job it is to spend other peoples’ money tend to see a proposal like this as carte blanche to fund other programs too (most of the complaints noted in my last bullet point have been along the lines of “this would be a great source of new funding to pay for _______, rather than returning it to taxpayers”).