Not Even Free Money Can Fix a Carbon Tax

A carbon dividend seemed like a great way to solve climate politics. But it might not work.

A quarter in a small pile of coal ash
Getty / The Atlantic

Once more unto the breach, my friends—once more to talk about carbon pricing.

For 40 years, economists and environmentalists have proposed a simple solution to climate change: Put a price on it. If the government levies a fee on every ton of heat-trapping pollution that goes into the air, then the economy will move to cleaner, cheaper energy sources, and carbon pollution will fall over time.

In practice, this means raising the cost of fossil fuels—and doing that is easier said than done. Despite support from literally thousands of economists, carbon-price schemes have no near-term chance of passage in the United States, and they cover only about one-fifth of the world’s emissions overall. Researchers have come to understand that carbon pricing presents an unusually difficult political challenge, because it marries very salient costs (all fossil-fuel costs go up, for everyone) to somewhat opaque benefits. Worse, some economists argue that carbon prices fall hardest on the poor, because lower-income households spend more of their income on energy.

So in the past few years, advocates have proposed a twist meant to bypass those obstacles and make an uncomfortable idea more acceptable, even popular. Under this new scheme, known as a revenue-neutral carbon price, the government taxes every ton of carbon pollution but, instead of using that money, simply returns it to taxpayers as a payment. In theory, this helps voters see not only the costs (higher prices) but also the benefits (a big juicy check).

In America, this “tax and dividend” idea has become fashionable as a nonideological, theoretically bipartisan salve to climate change, a way to tax carbon without growing the size of the government. It is championed by the Climate Leadership Council, the Citizens Climate Lobby, and … nearly zero sitting Republican politicians (alas). But abroad, some countries have actually gone and implemented the policy. And “there are a good number of hypothetical scenarios that show the idea has some promise,” Matto Mildenberger, a political-science professor at UC Santa Barbara, told me. This week, a team of researchers, including Mildenberger, published the first major study of whether a revenue-neutral carbon price actually increases support for climate policy. The results weren’t as good as the theory.

“We don’t find strong evidence that rebates are increasing people’s comfort with carbon pricing,” Mildenberger said. Even when people receive more in dividends than they pay out in the tax, they resent higher energy prices and tend to view the policy in light of their broader politics. “My basic view is that we’re not seeing evidence that dividends are a transformative way to overcome the politics of climate change.”

Mildenberger and his colleagues surveyed citizens of Canada and Switzerland, the two countries that have implemented something close to a revenue-neutral carbon price. In Canada, residents of some provinces receive a lump-sum carbon rebate as part of their annual tax return; all Swiss residents see the rebate as a discount on their health-insurance premiums.

Neither of these policies is the “ideal” tax-and-dividend scheme that some economists endorse, in which everyone receives a monthly or quarterly check. But they’re close, and they’re admirably progressive: In Canada, for instance, 80 percent of residents receive more in the rebate than they pay out in the tax.

Yet “in practice, [people] in Switzerland and Canada don’t know much about the rebates they’re receiving,“ Mildenberger told me. “They underestimated the benefit of the policy, and they overestimated the cost.”

In Ontario, for instance, nearly half of respondents didn’t know they had received a rebate. In Saskatchewan, most respondents did know but thought their rebate was, on average, $268 per year, when it was really $444. Support for the carbon tax was informed by party ID: Members of Prime Minister Justin Trudeau’s Liberal Party, which implemented the tax, supported it; members of the Conservative Party opposed it. When the researchers showed respondents their true rebate, nobody’s views changed, but right-wing respondents disliked the policy more. “They became more likely to believe they were getting ripped off by the policy,” he said.

In Switzerland, most respondents just didn’t know about the rebate. When told how much they had made from the policy, approval of the policy went up, but by a very small amount, the survey found. “There was nothing to support the more ambitious carbon taxes in the future that scientists say are necessary,” Mildenberger said. Last summer, Swiss voters narrowly rejected a larger tax-and-dividend scheme in a national referendum.

These tepid reactions to the policy are strictly irrational for most taxpayers, who are receiving what is, in effect, free money. Yet it makes a certain amount of sense: If you don’t support transforming society (and paying more at the pump) to address one of the major challenges of our time, why should $444 a year change that? “There’s a certain … weirdness to using dividends to solve the political challenges of carbon pricing,” Mildenberger said. “Because the actual benefit of carbon pricing is having a stable climate in 10 years. The payment is, like, a side benefit.”

For Mildenberger, the results suggested that subjective costs and benefits will always trump real economic facts. Because carbon prices affect every facet of the economy, and provoke lots of controversy, “there’s a fundamental asymmetry to the potential benefit you’re getting and the intense messaging you’re getting about costs,” he noted. In Ontario, for instance, the provincial Conservative government put stickers on every gas pump warning about the effect of the carbon price. A onetime yearly payment can’t beat such omnipresent messaging, he said. (Canada is planning to switch to quarterly checks soon, to raise the payments’ mind share.)

Gernot Wagner, an economist at NYU, was more sanguine about the results. “There are people out there who are convinced their policy design is the answer, and, look, it never is,” he told me. “At the end of the day, it’s all politics. And it’s all identity politics, which is not what we’d like to be the case, but it is.”

In his native Austria, he said, the government just implemented a carbon-tax-and-dividend scheme, along with a slew of business-friendly tax cuts and a national public-transit subsidy. “The whole package is what’s going to make the difference,” he said. More than 20 years passed between the first carbon-tax proposal in Austria, he noted, and the specific combination of policies and coalitions that made it possible.

For Mildenberger, though, the results show that it’s very hard to make policy create political feedback loops. In American history, only a few programs—such as Social Security, the GI Bill, and Medicare—have created political conditions that sustain and broaden them going forward. In general, “people are not mobilizing to defend their material interests,” he said.

In a political environment where election results themselves are contested, it’s folly to expect people to gravitate toward a reality-based understanding of costs and benefits, he said. “There’s much crazier things that people now believe than that the benefits or costs [of a policy] are $500 as opposed to $5,000. There may be real limits to how much we can expect the objective structure of policies to reshape politics in this moment.”

It’s a discouraging finding—and one that may point to a more hardball politics of climate change going forward. At least corporations can be counted on to mind their cash flow.