The planet’s changing climate requires immediate and effective action. Most policies that address environmental concerns however are fiscally regressive and have encountered growing public discontent. This paper argues that a fee and dividend scheme, taxing goods and services that are proven to harm the environment and redistributing the proceeds directly and equitably to the citizens of a jurisdiction, could reverse popular opposition and ultimately contribute to an efficient approach to combat climate change.
German might not be a beautiful tongue, yet it possesses the almost unparalleled ability to find succinct terminology for fundamentally important concepts. Among the most powerful and contentious expressions in the German language is the word for ‘tax.’ To tax in German is steuern, which translates to steer, direct or guide. A Steuer, the noun, therefore has the ultimately powerful characteristic of steering the political discourse, directing economic agents to make certain decisions and, by extension, to guide entire economies into one direction or the other. This particularly useful German term not only implies taxation in the sense of a levy, but allows for a broader interpretation of using the accrued capital for multiple purposes to bring about structural and systematic transformations. A Steuer, in this liberal construal, will be crucial in saving our planet and humankind.
This paper explains how capital raised by such a Steuer, specifically a fee and dividend scheme, will aid humankind to combat the biggest challenge it has ever faced: climate change. This approach is only a part of an integrated policy to tackle the multidimensional challenges posed by a changing environment. Nonetheless, if humanity is to curtail successfully the devastating consequences of climate change, the fee and dividend scheme will play an invaluable role.
While the fee and dividend idea is not novel, the scope herein presented is new. The Steuer combines politically challenging concepts such as a universal basic income that guarantees every citizen of a jurisdiction a certain wage level, with more conservative yet equally contentious approaches, like Pigouvian taxes on goods and services that a government considers damaging to society or the environment. With our planet at risk, the crises of today present governments with the unique opportunity to implement the Steuer. It is a politically feted combination of traditional policy to reduce pollution and fiscally as well as socially progressive redistribution. For politicians, it would create a sizable constituency who would not just be made better off by the combination, but would even have an interest in increasingly higher fees and hence dividends. With such a practical and realistically implementable tool readily at hand, climate change and social inequality have become a choice.
Humanity faces one of the biggest challenges our kind has ever had to overcome. Largely self-inflicted, anthropogenic climate change represents a civilizational threat that we have yet to step up to. Under the Paris Climate Agreement, struck in 2015, every nation volunteered a plan to cut its greenhouse gas emissions between then and 2030 to ensure that global temperatures do not rise by over two degrees Celsius above pre-industrial levels to avoid catastrophic consequences for the planet and its inhabitants. According to recent data, current pledges put the world on pace for around three degrees Celsius of warming this century. To reach the broader Paris goals, countries have to stimulate the transition towards clean energy and climate-responsible consumption over the next 11 years. But, with global emissions predicted to climb sharply this year, time is running out.
However, governments have yet to agree on a congruous solution, or whether there should even be one. While environmental disasters continue to spiral out of control, with increasingly destructive force, advanced economies have little progress to show for behind the bombastic pomp of high-level climate summits, such as Paris or more recently, Katowice. While the Katowice agreements have already entered public and political oblivion, the Paris accord has delivered helpful standards on what respective countries ought to achieve: decarbonization of the national economy and a move away from fossil fuels towards renewable sources of energy, such as solar and wind, and more sustainable consumption patterns. However, their governments appear to be at loggerheads over how to get there.
It has long been argued that decarbonization and moving towards so-called climate neutral lifestyles without red meat and plastic can generate socially optimal outcomes, creating new jobs and spurring innovation. In reality, the political economy of climate change policy is more challenging. The simplest and most efficient policies, which reduce emissions by making carbon and other pollution more expensive, tend to have regressive effects. In other words, those at the margins of society bear a disproportionately higher burden than other, more well-off members of society. Taxes on goods and services that are considered harmful to the environment without direct redistributive effects threaten their already precarious livelihoods.
The majority of people in advanced economies agree that it is necessary to transform fundamentally the world’s energy structure, but much of the burden of the adjustment is set to hit the living standards of those already worst off. France’s Gilets Jaunes protests, spurred by French President Emmanuel Macron’s move to hike fuel taxes in the name of combating climate change, are just the latest example of a world that has increasingly alienated the people who inhabit it. The Gilets Jaunes’ rage specifically was sparked by the perception of global policy compliance taking precedence over real-life problems like transportation. Essentially, higher fuel prices are difficult to bear for neglected rural areas that are more susceptible to higher cost of transportation, yet with fewer alternatives than affluent conurbations. Efforts to reconcile only a fraction of the urgent environmental issues have therefore been met with opposition and earned popular backlash.
There are good reasons for their discontent. Four decades of promises by myriad political leaders propagating the neoliberal dogma that globalization, monetization, deregulation, privatization, and a profusion of related reforms would bring unprecedented prosperity have gone unfulfilled. For some, the past decades have brought rising rents, soaring prices, high levels of under-and unemployment in rural and peri-urban areas, generalized precarity and stagnant wages. While a tiny elite seems to have skimmed the cream of global economic liberalization, large swaths of the population have fallen out of the middle class and plunged into a world of vulnerability and insecurity, barely earning enough to live, let alone care about something as temporally and spatially intangible as environmental despoliation. The tension between environmental action and social calm appears to be a conceptual dislocation between our actions and our consequences, which is as myopic as it is inherently human. Environmental action seems to have become a luxury. One protester of France’s Gilets Jaunes movement provocatively yet veraciously summarized this mismatch as “[t]he elites are talking about the end of the world while we’re talking about the end of the month.” The bottom line is: if I cannot heat my house in winter, I do not care about global warming, and even if I care, I cannot afford to change it. If I cannot provide my children with a relatively socially acceptable upbringing, I do not care about natural catastrophes caused by decades of irresponsible industrial activity and mass consumption of advanced economies. Even if I care, I cannot afford to care. Climate change requires a response that does not disrupt advanced economies’ social fabric nor undermine democratic regimes by alienating certain regions, groups, or individuals.
Advanced capitalist democracies, among them France, and only recently a number of emerging economies, have already moved the planet dangerously close to planetary boundaries and 1.1 degrees Celsius above pre-industrial levels, but “[y]ou can’t ask the French people to pay for the errors of globalization,” said one Gilet Jaunes protester. The fee and dividend approach argues that you can and the climate begs that you must. But, in so doing, you also redistribute the accrued capital to the French people in a highly progressive manner, benefitting those at the bottom of the income scale the most.
The theory is as simple as it is compelling. Essentially, how exactly environmentally damaging goods and services are made more expensive does not matter as long as their price increases and the revenue is collected, creating capital that is taken from future generations and/or the environment. The rudimentary theory is to nudge human actions away from behavior that damages the environment towards conduct that is environmentally neutral or even beneficial. The basic tool to achieve this is a Steuer, imposed on all products and services that bear potentially harmful consequences to the ecosystem, like fossil fuels, plastic, or red meat. The levy is most efficiently imposed once the harmful good enters the national economy and the premium is then passed on to the consumer.
As a result, end-users will turn away from more expensive goods and services and opt for more environmentally friendly and cheaper options, ultimately systematically altering consumer behavior. Those who continue to choose products that are subjected to a tax pay a premium and contribute to the scheme. The collected capital is then distributed as dividends to all citizens or legal residents of a jurisdiction. In the simplest version, all people get an identical amount that creates a permanent direct cash stream into every citizen’s pocket. Anyone who uses less than an average amount of environmentally damaging goods and services receives more in payments than they lost in higher prices. As a result, for those segments of society who cannot feasibly avoid certain polluting behavior like fossil-fueled transportation, the Steuer has a neutral net effect. This protects the most vulnerable while rewarding anyone for reducing their ecological footprint. Crucially, it confers struggling communities the means to respond to those incentives over time in ways that work for them.
A simple example of France’s fossil fuel sector helps illustrate the direct and redistributive effect of the Steuer. France has an adult population of around 40 million people. Every year, 220 million tons of oil equivalent enter its economy. A frequently cited tax by proponents of carbon taxes and environmental scientists of USD100 per ton of oil equivalent, would create annual capital flows of USD22 billion. Divided by the number of adults, this yields USD550 per adult person per annum. Other environmental harms could be included under the fee and dividend scheme such as plastics, different food stuffs and other polluting consumption habits would elevate the dividend collected by each adult citizen. The bottom decile of the French population earns a yearly income of approximately USD10,000. The redistribution of the Steuer would therefore shore up the bottom decile’s income by almost 5.5%. The top decile would receive less than 1% of their income. This is the real political game changer.
Albeit cognitively counterintuitive and a political balancing act, the accrued capital must not be invested in climate related or social policies. An honest environmental fee and dividend must not be spent on anything other than full distribution to the people. If any portion of the carbon fee is allocated to the government coffer, economic conservatives will view the Steuer as another form of taxation. In this political climate, the Steuer will become toxic and not feasible. Taxes also depress the economy whereas additional income is proven to boost economic productivity and thus lose the economic benefits that would accrue especially to low income people. It would also be a soothing measure to re-enfranchise and confer self determination to those at the economic margins who feel left behind by global forces and particularly hard hit by environmental policies.
The climate is changing and social inequalities are undermining attempts to alleviate this trend. The Steuer can only form a small part of a multidimensional fight against shifting environmental conditions. Time is running out and the prevailing political and social contexts are opportune. The Steuer herein proposed, essentially a progressive environmental Pigouvian tax with direct and equitable distributional effects, obtains the ability to change drastically the course of a species that has clearly lost its path. It is time for a Steuer that steers us back on track, directs us towards a sustainable path and guides us along the way.
Alexander Rustler is a Lemann Foundation Fellow and MPA in Development Practice candidate at Columbia University’s School of International and Public Affairs. He specialises in Advanced Policy and Economic Analysis in Emerging and Developing Economies. He holds a Masters in Political Economy from the London School of Economics.