Dr. James Hansen, our 2013 Joseph Priestley Award recipient, gave an impassioned plea for action to address global climate change in his address on November 7. Despite my agreement regarding the urgent need for policies to address anthropogenic climate change, I left his lecture feeling that while his contributions to our knowledge of earth’s climate dynamics and his heroic activism over the past decade deserve our applause and recognition, his understanding of the economics of emissions control is somewhat naïve.

Dr. Hansen is a brilliant climate scientist and I share his belief that we cannot pursue a path of willful ignorance on climate change. The world is quickly approaching a climate crisis; scientific consensus tells us that if we allow the earth to warm by 2°C we risk irreversible changes to the climate beyond our control. According the latest update from the Intergovernmental Panel on Climate Change (IPCC), a temperature rise of 2°C is associated with one trillion metric tons (mT) of cumulative CO2 emissions since 1750. As of 2011, 531 billion mT from human activity have already been added to the atmosphere. Even if we halt the growth of global CO2 emissions at 2010 levels (36.8 billion mT/year), an unlikely event given the growth in the developing world, we would surpass this “carbon budget” by 2027.

Hansen proposes the creation of a “fee-and-dividend” system in which fossil-fuel companies would be charged a carbon fee, imposed at the point of origination (well head, mine shaft, or point of entry), with 100 percent of the revenue collected distributed directly to the public through electronic payments. Hansen emphasizes that this is a ‘fee’, not a tax, since none of the revenue generated will go to the federal government, arguing that the administrative costs of the program will be negligible – this is overly idealistic. Even the most basic monitoring and enforcement mechanism would generate significant costs.

Under this system, the price of goods and services would rise according to the carbon intensity of their production process. The carbon fee would then be gradually increased over time to achieve the necessary reductions in CO2 emissions. According to Hansen, “prudent people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on” and those who make this transition most effectively will receive more in dividends than they do in added costs resulting from higher prices. However, the ease at which he assumes households can make this transition overlooks the very real socioeconomic disparities in the U.S. and the hardships many communities would endure.

Despite his assertions, this proposal is one of an upstream incrementally increased carbon tax with revenue recycling; a well studied and analyzed policy option in environmental economics for many years. Hansen argues that a system of tradable emissions permits (cap and trade) is cost inefficient, equates to a handout to Wall Street executives, and creates perverse incentives for industry, stating that if every polluter’s emissions fell below the cap, the price of permits would fall to zero, and the incentive to reduce emissions would disappear. This is a problem of policy design, not policy choice.

Basic theory of environmental economics tells us that a fee-and-dividend (tax-and-dividend) system à la Hansen and a system of tradable emissions permits with an incrementally lowered cap and auctioned permits are equivalent in their effects. A tax puts a price on carbon pollution, leading to fewer emissions. Cap and trade puts a limit on the quantity of emissions. From the perspective of any individual firm, generating additional emissions means buying more permits or in the case of a firm with excess permits, foregoing their sale; therefore, the incentives for emissions reductions are identical under the two systems. Hansen seems to argue that cap and trade systems do not go far enough in their effects on total emissions – this is an argument for a lower cap or one that falls more quickly over time – not an outright rejection of the policy. A carbon tax would face similar problems if set too low or increased too slowly over time.

In Hansen’s view, the simultaneous incentives for emissions reductions by firms and shifts in consumption away from carbon intensive goods and services by households would lead to a 30 percent reduction in emissions in the first decade under this fee-and-dividend system – a result that I would celebrate. However, while I applaud his activism and encourage public advocacy for climate policy, to assume that the above issues will simply work themselves out ignores decades of research by environmental economists and displays a lack of understanding or denial of the challenges and complexities of climate policy implementation.