Keeping the Government Whole: The Impact of a Cap-and-Dividend Policy for Curbing Global Warming on Government Revenue and Expenditure

James Boyce and Matthew Riddle

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: When the United States puts a cap on carbon emissions as part of the effort to address the problem of global climate change, this will increase the prices of fossil fuels, significantly impacting not only consumers but also local, state, and federal governments. Consumers can be “made whole,” in the sense that whatever amount the public pays in higher fuel prices is recycled to the public, by means of a cap-and dividend policy: individual households will come out ahead or behind in monetary terms depending on whether they consume above-average or below-average amounts of carbon. In this paper, we consider policy options for “keeping the government whole,” too; that is, policies to ensure that additional revenues to government compensate adequately for the additional costs to government as a result of the carbon cap. We compare the distributional impacts of two policy alternatives: (i) setting aside a portion of the revenue from carbon permit auctions for government, and distributing the remainder of the revenue to the public in the form of tax-free dividends; or (ii) distributing all of the carbon revenue to households as taxable dividends. The policy of recycling 100% of carbon revenue to the public as taxable dividends has the strongest progressive impact, yielding the biggest net monetary benefits for the largest majority of the people.

Keywords: Global warming; fossil fuels; climate change; carbon permits; cap-and-dividend (search for similar items in EconPapers)
JEL-codes: H22 H23 Q48 Q5 Q52 Q54 (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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