James Hansen has again been lecturing Congress on the virtues of tax-and-dividend. I’m no policy expert, but neither is Dr. Hansen, so I’m going to share some of my own amateur observations for the benefit of fellow Grist wonks.

Hansen did some calculations and came up with the following dividend estimates for a $115/ton (equivalent to $1/gallon) tax:

Single share: $3000/year ($250 per month, deposited monthly in bank account)

Family with 2 children: $9000/year ($750 per month, deposited monthly in bank account)

Wow! Free money! That sounds enticing. Of course, the money has to come from somewhere, so people’s energy costs would, on average, increase by the same amount. But with that much money sloshing around there are bound to be huge inequities. For example, I live in northern California, where we have a mild climate and little coal power, and I don’t need to drive much, so I might see my net income rise by maybe a couple thousand dollars. That would be nice, but folks back east who are paying more wouldn’t like it one bit.

The tax rate and dividend should increase with time. …

[The tax rate should increase until fossil fuel energy is not competitive with clean energy.]

Nothing’s going to happen until the tax rate is high enough to overcome the price barrier. Once it does, there will be a “tipping point” at which clean energy will start to overtake fossil fuels and a variety of positive feedback mechanisms (competition, technology, economies of scale, learning by doing) will make the transition self-sustaining and gradually less dependent on price supports. So what is needed is a high price incentive right away — not a gradually escalating incentive.

However, a high price incentive does not imply a high tax; it is possible to have an initially high and declining carbon price incentive implemented through an initially low and increasing carbon tax.

The dividend would put money in the hands of the public, allowing them to purchase vehicles and other products that reduce their carbon footprint and thus their taxes.

It’s not that simple. Vehicle owners don’t think much about fuel costs when they make purchasing decisions, so an effective policy would shift the monetary incentive into vehicle prices (e.g. via feebates). Suppose that were done, so that gas guzzlers in a particular vehicle utility class were subject to a $2000 carbon tax, while comparable hybrid vehicles with half the fuel consumption were only levied a $1000 tax. The $1000 price difference would cause buyers to favor the low-emission vehicle, and their carbon dividends would be more than sufficient to offset the $1000 tax.

Rather than routing the monetary incentives through dividends, an alternative approach would be to simply apply gas guzzler taxes to directly subsidize low-emission vehicles. For example, a $500 tax on the guzzler, which finances a $500 subsidy for the hybrid, would result in the same $1000 price differential and the same incentive for the hybrid — but without the complications and distributional inequities that would be created by an economy-wide carbon tax.

Better yet, keep the tax at $2000, and use it to fund a $2000 subsidy. Now you’ve got a $4000 price differential in favor of the hybrid.

Actually, that’s a little over-simplified. If hybrids make up a small market fraction — say, 10 percent — with guzzlers making up the other 90 percent, then a guzzler tax of only $400 could fund a $3600 hybrid subsidy, again yielding a $4000 price incentive.

Well, why not take it a step further: At a 10 percent hybrid market share, keep the tax at $2000 and increase the subsidy to $18,000!

Okay, that’s going overboard, but the point is that a very modest tax can create a comparatively huge price incentive immediately, while the hybrid market is in its nascent stage. As the hybrid market grows, the tax might increase to unreasonable levels to maintain the same price incentive, but by that time hybrid technology will have become cheap enough that the incentive can be diminished or even eliminated. (The same principle would apply to other industries like electric appliances and power generation.)

The broader point is this: If carbon tax (or allowance auction) revenue is applied directly and specifically for its intended purpose of reducing the taxed industry’s carbon emissions, and is not squandered on free handouts (“dividends”), then it is possible to create immediate and substantial price incentives far greater than anything that tax-and-dividend lobbyists (or cap-and-traders) have in mind.

If we want use dividends to give consumers an equity stake in decarbonization, we could do so by investing carbon tax revenue in renewable energy and clean technologies in exchange for equity, and distributing equity shares to the public on a per-capita basis. Those shares would yield dividends that increase — not decrease — as carbon is phased out.

[revised 3/2/2009]