Adam has responded to some of the questions I raised in my recent blog reporting on his proposal for a carbon wealth fund.
John raises some interesting
questions in relation to my proposal for a carbon wealth fund. I will try to answer them briefly here. I will assume that national funds are the
only practical way forward in the short to medium term, and look at a UK
sovereign wealth fund based on carbon revenue.
Use
of a global public good
First, John notes that there
are some differences between conventional resources, such as oil and gas, held
by nations, and the atmosphere, a global public good[1]. The distribution of a global public good will
inevitably be contentious. However
existing carbon pricing regimes or simply emitting free of charge already use
up a global public good. Giving citizens
and governments a greater stake in increased carbon prices is likely to
decrease the quantity of emissions, and so the proportion of the global commons
used[2]. This makes the approach I have proposed more compatible
with good stewardship of the global commons than existing arrangements, at
least for the next 50 years until revenues start to decline.
Macro-economic
effects
John also raises the issue of
the macro-economic effects on exchange rates and economic activity. However these effects would probably not be
large. The payment into a UK fund would
be around £16 billion p.a. at present, a little under 1% of GDP per annum[3]. This would be unlikely to cause major economic
dislocation, especially if phased in over a period of perhaps 5 years. The fund would grow large over time, reaching
around £860 billion by the end of the century[4]. However this is not vastly larger than the
Norwegian fund today, which is for a very much smaller economy. Furthermore any fund would have the effect of
redirecting revenue from consumption to investment, which would probably have a
positive macroeconomic effect in the context of historic UK underinvestment.
Would
it be regressive?
Then there is the question of
whether increasing revenue from carbon pricing would be socially regressive. The concern here is that poorer households
spend a larger proportion of their income on energy than richer households, and
so energy taxes tend to hit them disproportionately harder. However poor households still spend less on
energy, and therefore carbon, in absolute terms than richer households, so an
equal dividend, as I’ve proposed, would have the potential to have net
progressive effect. Furthermore,
households account for only a minority of energy use, but would get the full
benefit of dividends (or at least a large proportion), increasing the extent to
which it is progressive.
However there are some
important intergenerational issues to consider. The proposal for a fund takes the view that
present generations should safeguard capital assets so they retain value to
future generations. This is in line with
the standard definition of sustainable development[5]. However there are distributional issues here
which need to be addressed. Some present
citizens will be worse off.
Use
of green taxes
The proposal is clearly
consistent with using green taxes more widely as a policy instrument. What’s different from the standard approach
to green taxes is the suggestion of placing revenue in capital fund rather than
using revenue to fund current expenditure.
The landfill tax to which I referred in my original post currently
raises around a billion pounds per annum[6]. It would be natural to add this revenue to a
UK wealth fund.
Other
uses of funds
Finally, there is no reason
some of dividends from the fund should not be used to fund things like R&D. As I have previously discussed
there are many legitimate calls on revenue from carbon pricing. However there are many compelling arguments
for allocation direct to citizens, and this should in my view be a priority for
the fund.
There are also other issues to
consider, such as governance structures.
Many of these have been reviewed in the wider literature on sovereign
wealth funds[7]. Doubtless much work is needed to elaborate on
these details, as would be the case for any new institution. However the prize is worth the effort.
I very much welcome John
raising these questions. They are
exactly the sort of issues that need to be discussed, and I hope the debate
will not stop here.
Adam
Whitmore - 20th February 2017
[1]
There is an interesting question as to whether countries should have full
property rights to natural resources within their territories, as is often
assumed at present, but this is too large a subject to go into here.
[2]
The assumption here is that increasing prices from current low levels will
increase revenue. Carbon prices would
increase by a factor of say five or more in many cases, and it is unlikely that
emissions would decrease by an equal factor – though if they did it would be
very good news.
[3]
This assumes 400 million tonnes of emissions are priced, compared with 2015
totals of 404 million for CO2 and 496 total greenhouse gases (source
BEIS), implying a high proportion of emissions are priced. Carbon price is assumed to be £40/tonne,
roughly the Social Cost of Carbon at current exchange rates and well above
current levels. This would give total
revenue of £16 billion in the first year, less than 1% of UK GDP of
approximately £1870 billion in 2015. (source: https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom-uk-since-2000/
)
[4]
Assuming that the UK reduces its emissions in line with the Climate Change Act
target of an 80% reduction from 1990 levels by 2050, and then to zero by the
end of the century, and that 80% of emissions are priced at the Social Cost of
Carbon as estimated by the US EPA, converted at current exchange rates of
$1.25/£.
[5] Sustainable development is usually characterised as meeting the needs of present generations, without compromising the ability of future generations to meet their own needs.
[6] https://www.uktradeinfo.com/Statistics/Pages/TaxAndDutybulletins.aspx
[7]
See here for a specific proposal for a UK wealth fund: http://www.smf.co.uk/press-release-conservative-mp-calls-for-uk-sovereign-wealth-fund-to-address-long-term-and-structurally-ingrained-weaknesses-of-the-economy/ and Cummine (2016) cited in my original post
for further details.
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