Whenever revenues are collected, there is disagreement over how to dispose of them. A few possibilities are most frequently discussed:
- Refund them on a per-capita basis
- Reduce other taxes
- Subsidize renewable energy
Flexibility. This is again a key principle. A wide agreement on a strong policy is essential, and that is best facilitated by allowing each nation to determine how it will spend the revenues it collects by pricing carbon. Consequently, no treaty rules are needed, and the points made below are only meant as a guide to thinking about possible benefits of a pricing policy.
Per-capita Refunds. Such refunds have two major benefits. First they answer the charge that pricing carbon weighs too heavily on the world’s poor. In fact, the poorest would make money off carbon pricing with per-capita refunds. And this is fully justified. The combination (price and refund) simply pays them for their unused (equal per-captita) right to use the atmosphere. Second, because a majority of the population would receive refunds larger than what they pay in increased carbon prices, the policy would likely be more popular than with any other use of the carbon revenues.
Note that since per-capita refunds are unrelated to carbon emissions, such refunds will in no way undo the effects of pricing carbon, no matter how it is priced. The argument for this approach is that pricing carbon is like taxing energy, and the poor spend relatively more on energy than the rich. So pricing carbon is essentially a regressive tax.
A per-capita refund will undo the regressive effects of carbon pricing, and the net effect will turn slightly progressive. The average-energy user will see no net cost; high-energy users will pay more than their refund, and low-energy users will get more back than the extra they pay out. Roughly 60% of the population will “make money.”
Reducing Taxes. The standard economic argument is that most taxes are inefficient, so reducing any of these taxes will increase efficiency. This is correct, but it is only half the story, and the standard conclusion (to reduce other taxes) cannot be supported with only half an analysis.
Suppose for example that a progressive income tax is reduced. In this case, we have, in effect, replaced a progressive tax with a regressive (carbon) tax. In short, reducing another tax creates a trade-off between increased efficiency and (quite often) harming the poor. There is no morally supportable case for this, and economics provides no guidance that would favor efficiency over such backwards re-distributive effects. Hence those who argue for reducing taxes almost always simply avoid any discussion of the re-distributive implications.
Subsidizing Renewable Energy. The US Speaker of the House once remarked that the reason we put a price on carbon is to pay for renewable programs. This is backwards. The reason we favor pricing carbon is because it’s a far cheaper way of reducing emissions than is subsidizing renewables.