Carbon Caps With Universal Dividends: Equitable, Ethical & Politically Effective Climate Policy

By John Bailey
Institute for Local Self-Reliance

January 2008 [Download Full Report in PDF format]

Executive Summary

Common to many proposals addressing climate change is a cap on carbon emissions or carbon content of fuels. A cap will generate a market value for carbon.

A key issue is who will receive this value. Many agree that there should be a 100 percent auction of carbon permits, but there many opinions about how to disburse the money gained from selling these permits. This paper argues for a universal, equal dividend returned to each person.

A nationwide auction of carbon allowances conservatively could raise $50 - $200 billion annually or about $1 billion to $4 billion per year at the state level in Minnesota (at the higher level, this represents about 15 percent of annual state government spending).

A universal dividend makes a carbon cap ethical, equitable and politically effective.

Ethical – If the sky is owned by all humanity equally, then any value created from carbon caps should be distributed in equal amounts to everyone.

Equitable – A cap on carbon will raise the price of energy and energy intensive goods and services. A universal dividend will especially help low and middle income households absorb and manage those cost increases. Indeed, lower income households, on average, should receive back more in dividends than they pay in higher prices for fuels and products.

Politically Effective – Per capita dividends will enhance public acceptance of a carbon cap by largely or completely offsetting the negative economic impacts on tens of millions of households. In the early years of the cap, the price of carbon (along with energy and most consumer products) will increase as we establish a market price that will encourage supplies and manufacturers to substitute existing energy sources for low carbon fuels. But since the dividends rise as the value of carbon rises, the net impact on most households will be small.

[Download Full Report in PDF format]