There is an alternative to Labor’s ETS and the Coalition’s shambolic carbon scheme which seems superior to both: a fee-and-dividend system.

It’s a simple idea: the major emitters pay a fee per tonne of CO2 emitted. This is not a “great big tax”; the revenue raised is distributed straight back into the economy, either directly as a dividend paid out per person, or indirectly via a reduction in other taxes. Given Australia’s recent emissions of around 25 tonnes per capita, and an initial fee of $20 per tonne, an annual dividend of around $500 could be paid out to each person in the country.

The idea is that this dividend does two jobs at once: it offsets price increases in carbon-intensive goods and services (like coal-based electricity), and it encourages consumers shift to low-carbon alternatives.

In economic theory, the “fee-and-dividend” approach is a little less efficient than an ETS, but in practice it would be far more effective.

A fee-and-dividend system is likely to be harder to manipulate and weaken through the lobbying efforts of Big Carbon. We’ve seen the Government’s ETS proposal watered down with free permits and handouts to the extent that the effective initial carbon price is almost zero, rendering the ETS almost entirely pointless.

Fee-and-dividend also has the advantage of a relatively stable carbon price. The fee would be steadily raised over time, but would be far more predictable than under an ETS. This is crucial in securing investment in low carbon solutions.

All in all, a fee-and-dividend approach looks like a good bet if we want to bring about a low carbon future.

(This appeared as a Letter to the Editor in The Canberra Times of Wednesday 17 Feb 2010.)