Home AHCAG articles Carbon Policy: Part 1: Dividends, Subsidies and Incentives
Carbon Policy: Part 1: Dividends, Subsidies and Incentives PDF Print E-mail
Written by Richard Corin   
Tuesday, 10 August 2010 01:38

(This is the first of a three-article series. Follow these links for Part 1, Part 2, Part 3.)

The money raised from a carbon price should not be spent by the government on clean energy infrastructure!  After dealing with “border tax adjustments”, the carbon revenue should be returned to the people on a per capita basis (half for children), to help them pay for clean energy and voluntary efficiency measures. The best way to pay for clean energy infrastructure is by selling the energy produced by that infrastructure.  Like any bank, Government can make loans for self funding infrastructure, or private funds can invest, but sales of energy will pay for everything. 

The main reason for having a Carbon Price is to increase the price of fossil energy up to the price of clean energy, so that clean energy can begin to take over.  I hope to show that it is not appropriate to subsidise clean energy because it lowers the price of all energy – cheaper clean energy means a lower carbon tax to fill the price gap.  Rather than subsidising energy, it is better to maintain a steeper price incentive to reduce energy use, but recycle the carbon revenue equally to the citizens.

A low carbon price is a bad thing.  The carbon price has to raise the cost of fossil energy high enough to eventually replace all carbon burning energy systems.  A carbon tax with dividend rewards personal behaviours to reduce emissions.  The higher carbon price, together with the dividend, provides maximum incentives for voluntary action on climate change.  Those who avoid energy and products incurring greenhouse gas emissions, will have an option to invest their Carbon Dividend "profits" into shares for clean energy infrastructure, so rewards for effective action can be multiplied!

Let’s work through an example near the start of the scheme, when 90% of energy comes from fossil sources.  I will compare recycling the carbon revenue through a dividend to all individuals, with spending the carbon revenue on clean energy systems.  I will use three households, of two adults and two children, which differ by the amount of external energy they consume.  In this highly simplified world, all energy is electricity and all household purchases are emissions free.  It is designed to illustrate a point which remains true in the real world.

100% Dividend (simplified - electricity only, ignoring goods)

Suppose an average quarterly electricity bill for an average family was $300 but zero carbon energy would cost them $500, then tax & dividend would need $200 worth of carbon tax to equalise the two prices.  The effect would be that customers see the price of electricity rise by 66% and this provides a powerful incentive to change light bulbs & fridges, install solar hot water, insulate the house better and learn about thermal management using curtains and shades.

Since this is an average household, let’s call them the Grey family, they would get an average family carbon dividend of $180 to help them pay their $500 energy bill, or to spend on measures to cut their energy usage.  The average dividend is $180 rather than the full $200, because 9 out of 10 customers pay the $200 carbon tax for using fossil energy - but 10 out of 10 must share in that revenue. (Once we include transport fuel and goods & services, the real world dividend would be significantly more than this $180 derived only from electricity sales.)  Because of the $180 dividend, our average household pays $320 net for their energy bill, which is a 6.66% increase on $300. 

In reality, if there is only enough clean energy available to supply 10% of electricity then the retail price for clean energy will remain higher than fossil energy to moderate the demand for this still scarce commodity.  But it is fair to assume prices will be similar.

No matter what their consumption, every average family of two adults and 2 children will get this hypothetical $180 dividend per quarter - ($60 per adult plus $30 for children).  So, if the Greys can cut their electricity consumption by 4%, from $500 to $480, then, after subtracting the $180 dividend, they’ll only pay the same $300 that they used to.

Before we consider using the carbon revenue as a subsidy for clean energy, I want to look at two other households under this dividend scheme. One family who has cut its energy consumption to half and one which continues to consume twice the average.

a) The average family that uses half the average electricity consumption is the Green family.  The Greens will receive a quarterly electricity bill of $250, which, with the $180 dividend, leaves them with a net payment of only $70.  Under the previous regime, before the carbon tax and dividend, their bill would have been about $150, so this family seems to be making money from the carbon tax.  This $80 per quarter is helping them to pay for their solar hot water and high efficiency fridge. This family is also the one most likely to invest any spare income into further energy savings and may even be interested in buying shares in a clean energy power station if this option were promoted.  Such families are the heroes of the Zero Carbon Transition – the dividend system makes them winners and everyone wants to be like them. And so they should.

b) The average family that uses twice the average electricity is the Brown family. The Browns will receive a bill of $1000 which with the $180 dividend means they pay $820. Before the carbon tax their bill was about $600, so they will want to find ways to reduce the extra $220 of energy they are consuming.

Not only is Tax and Dividend the ethically based method of distributing carbon revenue, it also rewards those who do the right thing, rather than rewarding polluters.

Clean energy subsidy (simplified - electricity only, ignoring goods)

If the carbon revenue is directed to subsidising clean energy, then the carbon price would only add $20 to the existing $300 bill for the average family.  The increase due to the carbon price will only be $20, because every nine houses paying $20 extra raises the $180 required to subsidise the one house who is using expensive clean energy. $500 - $180 = $320.  The net energy bill for families with average consumption increases by 6.66%.  Note that this is the same as the above example. However, the lower carbon price provides little incentive and no rewards for voluntary reductions, because it is the same for every unit of electricity - it is merely a 6.66% price rise.

Let's look at the two other households under this scheme.  The Greens who cut their electricity consumption to half and the Browns who still use twice the average!

a) The Green family which uses half the average electricity consumption will receive a quarterly electricity bill of $160, which, is $10 more than if they made the same effort under the old regime. There is no reward for spending money to reduce emissions.  Before the carbon price was added, their bill would have been about $150, so this family is worse off under a system which subsidises clean energy, than when there was no carbon price.

b) The Brown family which uses twice the average electricity will receive a bill of $640 which is only $40 more than under the old regime. Before the carbon price their bill was $600, so an extra $40 is hardly worth doing anything about.


Because the difference in price between clean energy and fossil energy is small in both cases, the demand for clean energy will soar, but the supply will be limited by the speed at which we can build the factories that will manufacture the required annual production of clean energy infrastructure.  This is a whole new topic, but I mention it to remind you that it will take time to grow the industry that makes the stuff that eventually replaces the old fossil energy system.

When the new industries have matured and the rate of expansion slows down, I expect the price of clean energy to fall, but probably not until near the end of the transition process.

When half the fossil power stations have been closed down, the price of the equivalent quarterly clean energy bill without efficiency measures will probably remain around the same $500 hypothetical price used previously.  Assuming the Carbon Price closes the price gap between fossil and clean energy, the Carbon Dividend will now only be half the $200 contribution from the carbon tax, rather than 90% as it used to be.  With only half the population using fossil energy and paying the carbon tax, the dividend for each of these average families in this simplified model will be $100, so they will end up paying $400 for the same kWHs of electricity that they used to pay $300 for.  If those average families want to keep their bills down to $300, they will have to reduce their consumption by 25% compared with before the transition.  If they do, they will get an electricity bill for $400 but receive a $100 boost from the carbon dividend – to end up with no net change. 

In the case where carbon revenue is used to subsidise clean energy instead of producing dividends to individuals, the contribution to the average family's bill from the carbon price will be $100.  These average families will all receive electricity bills around $400.  Because half the customers are still using fossil energy, $100 from each of the carbon energy customers will subsidise $100 for each of the clean energy customers.

The result for the extremely average Grey family is the same – but with the dividend system, we have had a high and stable carbon price to encourage efficiency right from the start.  The subsidy method has a low and slowly rising carbon price that does not send strong signals for change.  Like the frog in the warming pot, the change is so slow that it fails to trigger action. 

At the end of the transition process, assuming we get that far in each case, both systems leave customers paying the full price for clean energy, but the dividend method improves efficiency and changes behaviour by starting with a real carbon price.  This is no trick.  It is simply the right way to deal with this issue.  The people are the shareholders of the atmosphere so they receive dividends from rationing the scarcity of their shared resource. They are free to spend it on what works best for them.  Government can help by providing good, independent advice and low interest finance for economically viable efficiency and energy substitution measures by businesses and households.

Subsidising clean energy is highly interventionist with a potential for misallocation and corruption. I much prefer to empower the customers to buy clean energy at the appropriate market price and to charge properly for carbon emissions!

There is no "cost to the economy" to recycle carbon revenue, and the real cost of clean energy will be the same in any case.  A recycled carbon tax can be very high with negligible negative effects on the economy.

For the same average cost to consumers, the subsidy path does not encourage or reward voluntary actions, but the dividend system does.  By recycling carbon revenue we multiply the value extracted from the customer's dollar.  The same carbon tax dollars are recycled again and again until they end up in the hands of a clean energy supplier. This is exactly what needs to happen. 

Please consider these profound advantages of the Carbon Dividend. Once people understand, they are usually won over to this superior solution, but I admit it is often difficult to explain something new, which people have not seen before.


A frequent response:-

Even if it does stimulate green infrastructure, I am concerned that handing the revenue to taxpayers won't result in lowering emissions.  It might go to plasma TVs, new cars and whitegoods

I have already compared the scenario of using carbon revenue to subsidise clean energy with distributing a personal dividend.  I wonder which of the three similar families might indulge in extra emissions generating consumption under the two different regimes.  You may recall the absolutely average in every way family is called the Grey family.  The tribe which reduced its emissions to half of average consumption was known as the Green family, and the mob with double the average emissions was called the Brown family.

The Grey family found themselves with exactly the same disposable income under both scenarios.  The Green family preferred the Carbon Dividend regime. Their net energy bill was $90 less than under the clean energy Subsidy plan.  But the Brown family had to pay out $180 more under the Dividend system than with the clean energy Subsidy.

It seems to me, that the Green family is the one most likely to spend their $90 “bonus” on reducing emissions further, or investing in clean energy infrastructure.  I strongly suspect their emissions were low because they already invested in energy saving and substitution measures and would be less likely to do so without knowing they could pay for them from savings accruing from the avoided consumption of expensive electricity.  On the other hand, the conspicuously consuming Browns were much happier under the energy subsidy, because cheaper energy meant they could afford to waste it.  With the $180 extra disposable income they had under the price subsidy scheme, they are the ones most likely to spend it on emission generating purchases.

The lesson is: don’t subsidise energy prices – pay people for their share of the atmosphere.

Factored into the price of every product and service will be the carbon expenses of every link in the supply chain.  The resulting price relativities will make low emissions products such as local produce more attractive and put high emitters out of business. 

The carbon dividend is not a rebate on your electricity bill. For most people, it will appear in your bank account just like an income boost.  For persons whose behaviour and consumption match the community’s average level of emissions, the carbon dividend will be sufficient to pay the entire carbon component built into almost every transaction.  The Carbon Dividend will entirely pay for a contemporary average level of emissions, but the average level itself will decline along with carbon revenue, as clean energy systems, energy substitution and efficiency improvements displace the burning of fossil fuels.

I too am concerned about dividend recipients spending their money on high energy products.  That is why I believe it is best to charge the full price for energy, so people will value it.  If people are already paying the full price of renewable energy, they will treat energy with the same respect as they would if every CO2 belching power generator had already been closed down.  The price they pay is the price they need to pay to make that happen.  By recycling the carbon revenue back to customers, we provide a mechanism to smooth the transition from today's cheap fossil energy to tomorrow's clean energy prices.  Tomorrow’s clean energy prices will not be quite so high, once the industry matures, becomes mainstream and the frantic rate of new construction slows.

I hope the mental light bulbs have come on and you have been won over, at last.  If you are doubtful about the simplifications and assumptions in these models, then I ask you to justify an alternative.  I think the clean energy price subsidy is a very good proxy for any effective subsidy program which relieves the consumer from paying the full price for clean energy.  Any price subsidy, by whatever method, can only increase emissions because people will be less motivated to save energy. 


Richard Corin

Last Updated on Sunday, 15 August 2010 22:19