Why I’m not signing the Economists’ Statement on Carbon Dividends

A few weeks ago there was a big news splash about the Economists’ Statement on Carbon Dividends, signed by an incredibly impressive group of economists: 27 Nobel laureates, 4 former chairs of the Federal Reserve, 15 former chairs of the Council of Economic Advisers, etc.

Other economists were invited to sign on, but I’ve decided not to, a decision that might seem odd given that I’ve devoted a considerable portion of my life energies to climate action. My decision of course means very little in the grand scheme of things—especially since I’m a nobody compared to the incredibly impressive group described above!—but I’m nonetheless going to take the opportunity to express my concerns.

I agree with the vast majority of the economists’ statement, and I have nothing but good wishes for the political campaigns being pushed by associated groups like the Climate Leadership Council and Citizens’ Climate Lobby.

But a public statement like this is only as strong as its weakest link, and I have concerns about this:

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.

There are three points I want to make about this.

First: Economists are in my view no better and no worse than anybody else in evaluating “fairness” or “political viability”. So even if I wholeheartedly agreed with this statement—which I don’t—I would be uncomfortable putting the weight of my economics degree in support of a statement that is not really connected to my academic training or expertise.

Second: This is a very strong statement, for the simple reason that “maximize” is a very strong word. I would have no problem with a statement that said “In order to address pocketbook impacts on households and attract bipartisan support, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates”, but that’s not what the statement says. What the statement says is that this is the best way to achieve “fairness and political viability”.

Third: I don’t see much evidence that this statement is true. In terms of political viability, there is evidence that revenue-neutral approaches like dividends don’t poll terribly well with the general public, and it is not hard to imagine that money for (say) coal communities might be necessary in order to gain support from key legislators.

As for “fairness”, is it fair for dividends to be the same for citizens in Utah (roughly 70% coal-fired power) and for citizens in Washington State (roughly 70% hydropower)? Is there a fairness argument for putting some carbon tax revenue towards addressing impacts on coal communities? (For more here see the work of Adele Morris at Brookings.) These types of questions are IMHO difficult to answer, and as noted above I don’t think economists have any special insights here.

And I think there’s one particular issue that’s worth considering in terms of both fairness and political viability: The economists’ statement says that carbon tax revenues will be returned to “U.S. citizens”, but what about the 11 million “unauthorized residents” living in the United States? It is almost impossible to imagine a politically viable policy that sends checks to these residents, and even if you wanted to it’s difficult to imagine the logistics to make that happen. But many of these unauthorized residents are quite low-income, and there is a significant political push on their behalf, so there are important issues here in terms of both fairness and political viability. My personal view is that it is impossible to square this circle and that this is a significant challenge for the dividend approach.

One final point: I happen to have some relevant political experience from outside of academia, notably as the founder and co-chair of the first-ever carbon tax ballot measure in the USA, the I-732 revenue-neutral carbon tax effort in Washington State in 2016. It was an attempt at bipartisan, business-friendly climate action, and to some extent it succeeded: we got endorsements from many Democrats, from 3 sitting Republican state senators, and from prominent Republicans like former state Attorney General Rob McKenna and former U.S. Senator Slade Gorton; perhaps more importantly, the Western States Petroleum Association was neutral.

But I-732 lost badly, receiving only 41% of the vote, in part because of opposition from Democratic Governor Jay Inslee, from the state Democratic Party, and from groups like the Sierra Club and Washington Conservation Voters. I-732 also faced opposition from “environmental justice” groups that specifically opposed the concept of revenue-neutrality. (They wanted a revenue-positive proposal that would “invest” carbon pricing revenue in clean energy and other EJ priorities.)

In 2018 all of these left-leaning folks supported the I-1631 “carbon fee” measure that was on the ballot, but that measure also lost badly, receiving only 43% of the vote, in large part because of $30 million in opposition spending from the Western States Petroleum Association, the same group that was neutral on I-732 two years earlier.

So my bottom line about carbon pricing is basically the same as the famous line about Hollywood by William Goldman:

Nobody knows anything…. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.

I am not here to rain on anybody else’s parade, and as noted above I have nothing but good wishes for folks pushing a dividends approach. But the claim that this is the way to “maximize… fairness and political viability” is not something I can sign on to as an economist or as a climate activist.

PS. UPDATE MARCH 18 2019: Here’s a comment from Marcus Marcus that arrived after the comment window was closed:

Interesting: I feel like I-732′s sale tax reduction was in some ways similar to a lump-sum rebate (with a bit to manufacturer’s and a bit to working families). Do you think your approach was better on the “fairness and political viability” metric? For example, maybe you prefer a sales tax cut because it applies to immigrants as well as citizens? [YB: I think there's a case to be made for various approaches. I'm happy to argue for the sales tax cut approach, but that doesn't mean I'm necessarily opposed to other approaches.]

Or, do you just disagree on principle with anyone claiming that any solution is “the best”, because who knows if there is something better? [YB: I think "my way or the highway" is a pretty dangerous position to take, just because there's so much we don't know about what (if anything) might work.]

I do like the William Goldman quote.

I tend to prefer market-based approaches (preferring tax over cap and trade) with the bulk of the revenue raised going to anti-regressive approaches (e.g., lump sum or EITC… a sales tax cut would qualify). EMF-32 results suggest a combination of capital tax cuts and lowest-quantile lump sum transfers would be a good way to reach a solution that both reduces inequality and has a small total welfare impact… but I think we’ve already cut capital taxes pretty deeply, and I’m unconvinced by the economic utility of cutting them for large companies in the first place.

But… I would vote for pretty much anything that would reduce emissions. It is frustrating when some environmentalists apply a purity test (e.g., with I-732: they should have gone all out supporting it, even knowing that they might want to try their own version down the road).

-MMM

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