A Free Market Solution for Climate Change – Something That Might Work!

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On World Environment Day 2017, the author talks about the Climate Change frenzy and a solution to resolve these hurdles.

  • By Amal Sethi

In case you have been living under a rock, President Trump is expected to withdraw from the Paris Agreement and join the esteemed company of Nicaragua’s Ortega and Syria’s Assad in the dismal minority apathetic towards protecting Planet Earth. We can keep playing the blame game and curse Trump and his conservative bandwagon, but in today’s polarized populist world, it would not be unexpected for any other major player to take this illogical step. It could very well have been France, had Le Pen won and who knows what the next populist move could be in Great Britain post Brexit. Trump might only fast forward the inevitable.

The Paris Agreement was bound to crash and burn. Countries would free ride on the emission reductions of other nations or would opt out due to populist pressures. Even if every nation did what it was required to do, we wouldn’t achieve much since the commitments of the Paris Agreement are too insignificant to reduce the global temperatures to the target of 2 degrees below pre-industrial levels. That’s the problem with a treaty negotiated by the consensus of 195 countries. Such a solution was always going to be about compromises.

A workable solution to climate change would need to jump three hurdles. It would need to incentivize the ‘averse-to-losses’ present, rather than ask them to care about the future. It would need to not be a zero-sum game and would rather have to incentivize businesses and partisan interests. Lastly, it would need to incentivize countries to build their own climate change programs rather than work around commitments or free ride on the emission reduction of other nations. Luckily, a group of people have ingeniously come up with such a solution. Ted Halstead of the Climate Leadership Council along with a few Senior Republicans, Economists and Business Leaders came up with what is called the “Conservative Case for Carbon Dividends” or as I like to call it ‘A Free Market Solution for Climate Change’.

The Conservative Case for Carbon Dividends rests on four pillars 1) A Gradually Increasing Carbon Tax 2) Carbon Dividends for All 3) Regulatory Rollbacks 4) Border Carbon Adjustments. This proposal starts with a Carbon Tax that would be implemented at the first point where carbon emissions enter the system. The recommended rate of tax is suggested at about 40$ a ton to start with, and this would gradually increase over time. The next step is the actual home run. Every penny collected from this Carbon Tax would be directly returned to the people via dividend cheques, direct deposits or contributions to their social security accounts. Estimates suggest that in the first year of the implementation of such a plan a family of four would receive up to 2000$ in the USA. This dividend would aid individuals cope up with the higher commodity prices as well as provide the impetus to switch to cleaner alternatives. Additionally, at the standard rate of 40$ a ton, families would be slated to get back more in dividends than they would pay in increased costs.

Having put in place a system of Carbon Dividends, countries can soon start to rollback regulations designed to reduce carbon emissions and possibly remove liability for emissions. This is where it gets interesting; such a proposal would benefit both partisan interests who are against large scale governmental regulations and business interests who now have the flexibility to reduce emissions and make capital investments in technology at their own pace and in their own ways. 

As far as imports and exports are concerned, exports to nations without comparable carbon pricing systems would receive rebates for carbon taxes paid domestically, while imports from such nations would be levied duties depending on the products carbon content. Moreover, any such collected taxes from imports would also be distributed to the people in the form of carbon dividends. This mechanism would protect domestic businesses and punish free riding by other nations. A country without comparable carbon pricing systems would soon realize that its lack is putting them at a loss and benefiting citizens in another country. This would, in turn, give them the push to implement similar carbon reduction programs in their own country. With even one major player implementing such a Free Market measure, the world could within no time have a domino effect of self-enforced carbon reduction programs. Voila, we could now have something in place that international instruments cannot dream of achieving.

This program isn’t even close to perfect and leaves a lot of questions unanswered. Further, there will be potential pushbacks from the rent seeking energy industry. In fact, even environmentalists would look at this skeptically and would most probably be against this daring system of rolling back regulations and making climate saving self-regulatory. Critics might even point out to the lack of interest from developing countries like India and China. However, it can be rest assured that India and China would certainly be more interested in a Free Market Solution rather than one that puts them at a direct disadvantage. Fair estimates from The New York Times independent evaluation put the estimated reduction of emissions from a Free Market based proposal to twice as much as what would be possible from the effective implementation of all regulations combined.

In reducing emissions this way, the ‘common man’ is for the first time gaining rather than taking the hit which is the case in every measure. Ergo, while our fingers are crossed for the Paris Agreement, the need of the hour might be to shift the narrative of climate protection and join hands in coming up with a Free Market Solution where all sides win. After all, such a measure would be in sync with the slogan of our times “pro-growth, pro working class and pro-competitiveness.”  

Image Courtesy here

Amal Sethi is a Doctoral Candidate in Law and a Legal Writing Fellow at the University of Pennsylvania. He is also a Salzburg Cutler Law Fellow. His research focuses on Constitutional Courts in Emerging Democracies.