As alarm over climate change rises, the idea of a “Green New Deal” is growing in popularity, including among candidates for the Democratic presidential nomination. But most of the candidates have been notably skittish about discussing a price on carbon, the climate policy widely advocated by economists as the best way to encourage the investment, innovation, and infrastructure needed for a transition to clean energy.

That’s because there is one big problem with putting a price on carbon: It will raise the prices of gasoline, electricity and everything else that’s made or distributed using fossil fuels. The impact on household budgets will be highly visible, especially if the price is steep enough to make a significant dent in the country’s carbon emissions. Critics rightly note that consumers will be unhappy. And unhappy consumers make for unwilling politicians.

The extra money consumers will pay does not vanish into thin air, however — the key question is, who gets the money?

Under the cap-and-trade proposals that were floated in this century’s first decade, most of the money would have gone as windfall profits to firms that got free carbon permits. Some big corporations — especially those on the receiving end of the multibillion dollar giveaway – liked that idea. Other folks, not so much. Cap-and-trade bills repeatedly went down to defeat on Capitol Hill.

Under some carbon tax proposals, the money would go to the government. Some environmentalists – especially if the revenue is earmarked for green investments – like this idea. Other folks, not so much. Fuel taxes are not popular. The yellow vest movement that has been roiling French politics since November was sparked by a modest fuel tax increase.

But there’s another idea that offers a solution to the carbon price conundrum — a carbon dividend that gets sent back to taxpayers.

A version of such a dividend is already in place in Alaska, and to grasp how carbon dividends would work, it’s worth recalling its history. The idea originated with an ex-Marine pilot by the name of Jay Hammond who settled after World War II in a small Alaskan community on the windswept coast of the Bering Sea, the world’s richest fishing grounds for sockeye salmon. There he was struck by the stark contrast between the offshore wealth scooped up by commercial fishing fleets and the onshore poverty of local residents, who lived without basic amenities such as indoor plumbing, electricity, phone service or a high school. The fishery was a natural asset that rightly belonged to the community, Hammond thought, so why shouldn’t benefits from its use accrue to everyone?

When Hammond was elected to the state Legislature in the 1960s, he proposed a remedy: let local governments collect a tax on the fish harvested in their waters and use this money to pay cash dividends to local residents. This would lift local incomes, and thereby strengthen the local tax base, too, yielding more revenue for public goods and services. His effort faltered, but when Hammond was elected Alaska’s governor in 1974 he applied the same logic to an even bigger natural asset: the newly discovered oil on Alaska’s North Slope and extended it statewide. This time he succeeded.

The result was the Alaska Permanent Fund. Since the early 1980s, the Permanent Fund has invested the state’s oil royalties and paid annual dividends of as much as $2,000 to every resident of the state. Not surprisingly, this program has proved to be highly popular among Alaskans.

The Alaska solution has won accolades across the political spectrum. On the left, it has been hailed in Vox as an “amazing true socialist miracle.” On the right, libertarian economist and Nobel laureate Vernon Smith has extolled it as “a model governments all over the world would be well-advised to copy.”

In 2001, in a book titled Who Owns the Sky?, social entrepreneur Peter Barnes extended the idea to climate change: Why not treat the atmosphere’s limited capacity to absorb carbon emissions as an asset, just like Alaska treats its oil? Barnes proposed the creation of a “sky trust” that would collect revenue from putting a price on carbon emissions and return the money as equal dividends to every person in the country.

This is an example of a “feebate” system: Individuals pay fees according to their use of a shared resource and receive rebates by virtue of its common ownership. The concept can be illustrated by means of an analogy.

Suppose that 1,000 people work in an office building whose parking lot has only 300 spaces. If everyone thought they could park for free, the result would be chronic excess demand and congestion. To avert this outcome, a parking fee is charged that limits demand to fit the lot's capacity. Every month the money collected in parking fees is distributed as equal rebates to everyone who works in the building. Those who take public transit or bicycle to work come out ahead: They pay little or nothing and still get their share of the revenue. Those who carpool to work more or less break even. And those who commute every day in a single-occupancy vehicle pay more into the pot than they get back.

Carbon dividends apply the same idea to parking fossil carbon in the atmosphere. Everyone who consumes less-than-average amounts of carbon comes out ahead, receiving more in dividends than they pay in higher prices. This includes the vast majority of low-income households, since they consume less-than-average amounts of just about everything, including fossil fuels. Most middle-class households break even or come out a bit ahead. Upper-income households, especially the “one-percenters” with outsized carbon footprints from lifestyles that include larger homes and more jet travel, pay more in higher prices than they receive in dividends, but they can afford it. And of course, everyone benefits from cleaner air and a more stable climate.

A notable feature of carbon dividends is that they turn what would otherwise be a regressive policy — as a percentage of household incomes, carbon pricing hits the poor harder than the middle class, and the middle class harder than the rich — into a progressive one. They’re not enough to solve the country’s inequality crisis, but at least they help instead of making it worse.

Support for carbon dividends is growing on both sides of the political aisle. On the Democratic side, Maryland Senator Chris Van Hollen proposes to cap the nation’s use of fossil carbon, auction permits to suppliers up to this limit, and return all of the money to the public. In the first Democratic debate, the idea got a shoutout from South Bend mayor Pete Buttigieg. On the Republican side, elder statesmen George P. Shultz and James A. Baker III are among the prominent co-authors of the “Conservative Case for Carbon Dividends,” issued in 2017 by the Climate Leadership Council. In the House, a bipartisan bill called the Energy Innovation and Carbon Dividend Act has been introduced jointly by Florida Democrat Ted Deutch and Florida Republican Francis Rooney, along with about 40 other co-sponsors.

These and other proposals differ in important details. One crucial issue is how to set the carbon price. Only a price anchored to a well-chosen emission reduction trajectory can ensure that climate policy goals are met. This can be done via a cap, a tax with a rate that adjusts automatically as needed, or a combination of the two in which the cap puts the ceiling on emissions and the tax is the floor price for permit auctions. Simply choosing a price and hoping it does the job is a recipe for uncertainty at best and failure at worst.

Another key issue is how to fund accompanying public investments in energy efficiency and clean energy that are a centerpiece of the Green New Deal. The main job of carbon pricing is not to raise revenue for public investments — there are far more progressive ways to do this — but rather to shift private investment and spending away from fossil fuels toward greater efficiency and cleaner energy. Some carbon revenues could be used for public spending — say, 25 percent — without seriously compromising the goal of protecting the real incomes of middle-class and low-income households with dividends. It would be an irony, however, as well as a political Achilles heel, if investments in the Green New Deal were funded primarily by a regressive tax.

Carbon dividends are emerging as the political sweet spot for a future bipartisan agreement in Washington. If and when lawmakers get serious about tackling climate change, the best route out of partisan stalemate may well be a carbon dividend. Treating natural assets as universal property that belongs equally to all, and rewarding everyone for using that asset wisely, is an approach that can unite environmentalists and free-marketeers, Democrats and Republicans, on a solution to what is arguably our most urgent national challenge.



James K. Boyce, a senior fellow at the Political Economy Research Institute of the University of Massachusetts Amherst, is the author of “The Case for Carbon Dividends,” published this week by Polity, from which this essay is adapted.

Authors: