Administrative Cost Laser Talk

Administrative costs of Carbon Fee and Dividend

CCL estimates annual administrative costs for the fee and dividend portion of our policy will be $5-6 billion per year. This estimate does not include the border adjustment. This is 7-8% of revenues in year one, 4% of revenues by year 3, and less than 2% by year 6. To arrive at these estimates, we compared our relatively simple CF&D program to the more complex but comparable operations of the IRS, which has an administrative budget of $12.9 billion. We considered startup costs, amortization period, annual operating cost, population growth, and emissions reduction rate. These administrative costs would be taken from program revenues, it pays for itself, so there is no additional cost to the federal government.

Of course, small changes in assumptions could result in higher or lower costs than presented here. This is based on what we view as a reasonable scenario, and you are welcome to look at the assumptions and calculations in the advanced version of this laser talk to come to your own conclusion. However, we think this is a good starting place for getting a rough idea of program costs, and a useful framework on what factors to consider.

CCL estimates annual administrative costs in the range of $5 to $6 billion dollars, which will amount to 7-8% of the $80 billion carbon fund cash flow in the first year, but as carbon fee cash flow steadily increases, the fraction consumed by administrative costs will drop to less than 4% by Year 3, less than 2% by Year 6, then more slowly to 1% where it remains essentially flat.

This estimate was based on five components: startup cost, amortization period, annual operating cost, population growth, and emissions reduction rate.

For our baseline scenario, we estimated initial startup costs for offices, equipment, staffing up, programming, etc., at about $5 billion based on requirements for typical business operations of this size. We amortized startup costs over a 7-year period at an interest rate of 8 percent. We factored annual administrative costs from the IRS administrative budget of $12.9 billion [1], with the substantially simpler task of collecting carbon fees and distributing carbon dividends recognized through a line-item comparison with IRS operations, resulting in a Year 1 CF&D operating budget estimated at $4.7 billion. We assumed the annual growth of operating costs paralleled population growth as reported by the census bureau [2]. The decline curve for CO2 emissions was obtained from the REMI report [3].

The graph below shows how the total administrative cost for each year and the percent of total carbon fee cash flow represented by that cost looks in our baseline scenario.

admin costs

  1. Internal Revenue Service 2016 budget request.
  2. 2014 National Population Projections: Summary Tables.
  3. “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” Regional Economic Models, Inc. (REMI). https://citizensclimatelobby.org/remi-report/

CCL estimates annual administrative costs in the range of $5 to $6 billion dollars, which will amount to 7-8% of the $80 billion carbon fund cash flow in the first year, but as carbon fee cash flow steadily increases, the fraction consumed by administrative costs will drop to less than 4% by Year 3, less than 2% by Year 6, then more slowly to 1% where it remains essentially flat.

This estimate was based on five components: startup cost, amortization period, annual operating cost, population growth, and emissions reduction rate.

For our baseline scenario, we estimated initial startup costs for offices, equipment, staffing up, programming, etc., at about $5 billion based on requirements for typical business operations of this size. We amortized startup costs over a 7-year period at an interest rate of 8 percent.

To estimate annual operating costs, we examined the IRS and SSA administrative budgets of $12.9 and $12.5 billion, respectively, to select a benchmark [1,2]. We compared their line item budget requests for 2016 with respect to analogous functions for the CF&D program. It became clear from line item descriptions that the IRS budget structure provided a better line-by-line comparison, so that was chosen to develop the CF&D estimate.

We factored annual administrative costs from the IRS administrative budget, recognizing the substantially simpler task of collecting carbon fees and distributing carbon dividends compared to the much greater complexity of IRS operations This process resulted in a Year 1 CF&D operating budget estimate of $4.7 billion. Table 1 below details this comparison of CF&D operations with comparable functions in the CF&D based on IRS descriptions of their line-item elements. The cost ratio estimate for each line item was based on relative policy complexity and payer/payee populations as explained below in the table.

Table 1. Estimation of CF&D Cost Based on IRS Budget

table1

Taxpayer Services, Filing, and Accounts: While the IRS must collect taxes and manage records from 120 million individual and corporate taxpayers, the carbon fee would be collected from only about 1,140 fossil fuel collection points [3], greatly simplifying tax collection compared to the responsibilities of the IRS. Distribution of the dividend, by analogy to income tax refunds, would reach a larger number of recipients more frequently, but accounting would be far simpler because there are only two payment amounts (adult and child dividend) and all of the required recipient data are already available through the IRS database.

Enforcement: The IRS also spends over 40 percent of its budget on investigation and law enforcement, but the CF&D program offers very few opportunities for fraud or violations compared to the vast number of forms, deductions, credits, and bulletins involved in IRS tax management. Therefore we estimated much lower costs for Enforcement in the CF&D.

Operations Support: Although brick-and-mortar infrastructure for the CF&D may be fairly close to that required for the IRS, the greater simplicity of the CF&D code again suggests far lower costs for computer systems, security, and communications.

For years beyond Year 1, we assumed the annual growth of operating costs would parallel population growth as reported by the census bureau [2], because the number of dividend recipients would grow at that rate while the number of fee-paying entities – fossil fuel producers – would likely remain constant or even decline. Table 2 below shows the U.S. projected population growth and the impact on annual administrative costs (excluding amortization of startup costs).

Table 2. U.S. Population Growth and Impact on Administrative Cost

table2

The last factor requiring consideration was the actual amount of fossil carbon that would generate fees. Those data were obtained from the decline curve for CO2 emissions reported in the REMI study [3], modified to assume a starting CO2 emissions inventory identical to that reported by the Energy Information Administration for 2015 (the latest year for which measured data are available) [4]. This represents the cash flow through the CF&D fund, independent of administrative costs. Assuming a $15/metric ton fee in Year 1 and a $10 increase each year thereafter, the carbon fee total grows from $79 billion in Year 1 to $544 billion in Year 20.

The graph below shows the result of this scenario forecast over a 20-year period, expressed as total administrative cost and the percent of total carbon fee cash flow represented by that cost.

CF&D Administrative Cost in Dollars and Percent of Carbon Fee Cash Flow

admin costs

  1. Internal Revenue Service 2016 budget request.
  2. 2014 National Population Projections: Summary Tables.
  3. “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” Regional Economic Models, Inc. (REMI). https://citizensclimatelobby.org/remi-report/
  4. Renewables and Carbon Dioxide Emissions.” May 2016. U.S. Energy Information Administration.