In addition to income tax and a land value tax, a third possible way to fund a basic income or citizen’s dividend is a carbon tax. Environmental group the Citizens Climate Lobby provides this graphic to demonstrate how this could work:
The idea would be to impose a tax on carbon at the point of extraction, which would raise prices along the supply chain. However, the revenue collected would be pooled together and redistributed among the population, thus compensating consumers for the increase in prices.
The increase in the prices of carbon-intensive products and services would reflect the true cost of carbon emissions on society and the environment:
“For decades now, we’ve been tinkering around the edges of the core issue, which is that we’re not taking responsibility for the true costs of fossil fuels” explains activist Camila Thorndike in an interview with non-profit YES! Magazine. “This is a classic case of market failure. Right now it’s obvious that the costs of climate change are astronomical—in the form of hurricanes and wildfires and lost productivity—yet we still don’t have a price on carbon. Energy prices are basically lies right now because we know that clean energy is the most economical and healthful decision, but it doesn’t pencil out because polluting forms of energy are artificially cheap. We need a price on carbon to ensure that prices reflect honest information.”
Distributing all revenue from the tax to citizens as a dividend ensures that the impact on consumers, particularly on poorer households, would be minimal. At the same time, people would be incentivised to use fewer carbon-intensive products and instead purchase relatively cheaper, cleaner alternatives in order to save money and maximise their profit from the dividend.
The dividend would ensure that consumers do not lose their purchasing power, meaning that the tax wouldn’t harm the economy. A study conducted on behalf of the Citizens Climate Lobby showed that a carbon tax and dividend would actually add 2.8 million jobs to the American economy while reducing carbon emissions 52% below 1990 levels over a period of 20 years.
In the UK, an LSE study concluded that a carbon tax of £20 a tonne would have “little impact” on consumers, raising prices by only 0.9%. However, the authors of the report argue that the impact could be even lower since the carbon tax would “incentivise green behaviour change, drive business innovation, and provide the Treasury with revenues that it could recycle back into the economy”. £20 could therefore be a starting price for carbon that rises over time to encourage innovation and further cuts in emissions as businesses and consumers adjust to the new tax.
Amid criticism that the European Union’s cap-and-trade scheme has failed to achieve the desired results, a carbon tax and dividend could provide a simpler, more effective solution to support the transition to a low-carbon economy. It could also be a great way to introduce the UK to the idea of a universal, unconditional payment to all citizens, similar to a basic income.