Designing a Carbon Tax and Dividend Scheme When People Differ by Place of Residence, Occupation and Investment Holdings
The 3 Groups
Suburban and Rural Residents --- Imagine if you live in center city San Francisco. You do not drive much. You live in a small apartment. You use little air conditioning. Your carbon footprint is tiny. See my 2010 paper with Glaeser. If you moved to rural Kentucky, you would drive much more and live in a much larger home that would use more oil for winter heating and electricity for summer air conditioning. Given that local power is generated using coal, the carbon tax would have a much larger bite for you. My point is that one's initial location in the United States (both which metro area and where within the area you live) plays a key role in determining whether you bear the incidence of the new carbon tax.
Fossil Fuel Industry Workers -- -As the carbon tax grows larger, jobs in coal mining and oil refining will diminish. These people will be unemployed for a while. Labor economists have documented that there is duration dependence such that a spell of unemployment makes you less likely to easily transition to another job. Unfortunately, we have learned from James Heckman's work that job training for middle aged people is rarely effective in helping them transition to new careers. My work with Jonathan Eyer helps to explain why states that mine coal have sought to preserve these jobs with special policies.
Investors in Fossil Fuel Supporting Assets --- If you own a $800,000 house in Houston or if you own $100,000 worth of Exxon stock, the increase in the carbon tax will lower the value of these assets. Why? Houston's economy is partially based on fossil fuel exploration and extraction. So, is Exxon. A carbon tax induces substitution away from these activities and lowers the value of assets tied to these industries.
So, note that there are at least 3 broad constituencies who have pocket book reasons for opposing carbon pricing. A well meaning economist who seeks to devise a "cap and dividend" program must figure out how large a $ check to write to each American household. The challenge here is that there are 330 million Americans and each differs along the 3 factors I listed above. It would take quite a sophisticated model for the government to figure out for each person --- where does Matt Kahn live? What industry does he work in? What assets does he currently own? With the IRS micro data, a research team could know #1 and #2 above but not #3.
If cap and dividend cannot be implemented, then opposition to carbon pricing is likely to continue.
A good mechanism design scholar should figure out a mechanism for each American to truthfully reveal her "carbon position". That would be a good research project!
It is important to note that the carbon tax raises a set of difficult counter-factuals; how much will Houston home prices decline by if there is a significant carbon tax? How much will coal miner unemployment increase if there is such a tax? Will displaced coal miners find an equally good job 8 months later? What transition costs will be imposed on them? Without knowing the answers to these questions, how does one devise "the right" dividend for such affected individuals? Without such a well structured (and credible) dividend, these individuals will oppose the Pigouvian policy.
Finally, you should note that I have implicitly assumed that people are income maximizers. In reality, utility maximizers will differ along another dimension. Some are more concerned about the impact of climate change than others. For those who worry about climate climate negatively hurting our world, they require a smaller dividend check in return for their supporting carbon pricing. The revelation mechanism would also have to yield this key unobservable to help the carbon tax designer figure out the efficient allocation of the carbon revenue that is recycled back to the people.