As reported in the Globe and Mail today by Julian Beltrame, the IMF calls on Canada to raise carbon taxes, cut income taxes. Sounds eerily familiar? You are correct. Stéphane Dion proposed exactly that in the federal election in 2008—and lost. Dion's poor performance has often been attributed to his "Green Shift" proposal, a major plank in the Liberal election platform. As Andrew Coyne pointed out in Macleans's Magazine shortly afer the election (The Green Shift that might have been), the policy was put forward at a time of skyrocketing oil prices, and the Liberals "botched the specifics". The revenue neutrality that was proposed didn't quite add up, as Andrew Coyne pointed out already in June 2008 (Half shift). We can learn one important lesson from the 2008 election: a carbon tax that isn't also seen as a full equivalent tax cut elsewhere won't catch the imagination of the electorate. Enter the IMF, and the climate dividend.

The IMF just published the book Getting energy Prices Right: From Principles to Practice. Unsurprisingly, the book concludes that there is pervasive mispricing (or better: non-pricing) of environmental externalities, from greenhouse gases to road congestion and beyond. Pricing energy higher will reduce these environmental externalities and generate revenue to offset burdensome taxes. Revenue from a carbon tax can help reduce economic distortions from other taxes, in particular income taxes.

Enter the proposal of The Carbon Dividend as explained by my professorial colleague James Boyce (University of Massachusetts) in an op-ed piece in yesterday's New York Times. A proposal by Congressional representative Chris van Hollen of Maryland would require fossil fuel commpanies to buy carbon permits for the fuel they sell, and the revenue from auctioning the permits would be distributed to individuals as a quarterly or annual dividend. This model follows the template of the popular Alaska Permanent Fund, which pays dividends from oil royalties to residents of Alaska. Because dividends are distributed on a per-head basis, lower-income households would benefit more than higher-income households. A carbon dividend differs from other revenue-neutral carbon pricing proposals in the way it redistributes income. Therefore, it seems obvious to conclude that a carbon dividend will appeal to a much broader group of voters than a reduction in income taxes. It passes one important test: it is simple and transparent because all revenue is recycled through a "Carbon Permanent Fund" rather than through general revenue of the federal budget. Republican lawmakers in the United States should have a long good look at this proposal if they are serious about climate change. It may well become the foundation for bipartisan leadership on the climate change file.

Back in Canada, the debate continues. While the Globe and Mail's Margaret Wente believes that a Politically unpopular carbon tax won't work, the Globe and Mail's Eric Reguly supports the notion that A revenue neutral, comprehensive carbon tax is the least bad option. Perhaps Ottawa should start looking south of the border for innovative ideas on how to break out of the deadlock on climate change policy.