Carbon Fee and Dividend Explained

What is Carbon Fee and Dividend?

Carbon Fee and Dividend is the climate change solution created by Citizens’ Climate Lobby (CCL) to account for the costs of burning fossil fuels. Climate scientists and economists alike say our solution is the best first step to reducing the likelihood of catastrophic climate change from global warming.

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Why Carbon Fee and Dividend?

Because 97 percent of climate scientists are convinced, based on the evidence, that human-caused global warming is happening.

Carbon Fee and Dividend’s Impact

Within 20 years, Carbon Fee and Dividend reduces greenhouse gas emissions 52% below 1990 levels while growing the economy and saving lives.

Who supports
Carbon Fee and Dividend?

The Basics of Carbon Fee and Dividend

1

Place a steadily rising fee on fossil fuels (coal, oil and gas).

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2

Give 100% of the net fees back to households each month.

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3

Use a border adjustment to stop business relocation.

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4

It's good for the economy AND even better for the climate.

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Carbon Fee and Dividend In-Depth

Below you’ll find Carbon Fee and Dividend described in detail and answers to frequently asked questions or FAQs. Additionally, how Carbon Fee and Dividend, or a revenue-neutral carbon tax, impacts the climate and economy is detailed in the REMI report.

The Policy

Download Carbon Fee and Dividend, a full-text version of CCL’s Carbon Fee and Dividend proposal.

Findings:

1. Causation: Whereas the weight of scientific evidence indicates that greenhouse gas emissions from human activities including the burning of fossil fuels and other sources are causing rising global
temperatures,

2. Mitigation (Return to 350 ppm or below): Whereas the weight of scientific evidence also indicates that a return from the current concentration of more than 400 parts per million (“ppm”) of carbon dioxide (“CO2”) in the atmosphere to 350 ppm CO2 or less is necessary to slow or stop the rise in global temperatures,

3. Endangerment: Whereas further increases in global temperatures pose imminent and substantial dangers to human health, the natural environment, the economy, national security, and an unacceptable risk of catastrophic impacts to human civilization,

4. Co-Benefits: Whereas the measures proposed in this legislation will benefit the economy, human health, the environment, and national security, even without consideration of global temperatures, as a result of correcting market distortions, reductions in non-greenhouse-gas pollutants, reducing the outflow of dollars to oil-producing countries and improvements in the energy security of the United States,

5. Benefits of Carbon Fees: Whereas phased-in carbon fees on greenhouse gas emissions (1) are the most efficient, transparent, and enforceable mechanism to drive an effective and fair transition to a domestic-energy economy, (2) will stimulate investment in alternative-energy technologies, and (3) give all businesses powerful incentives to increase their energy-efficiency and reduce their carbon footprints in order to remain competitive,

6. Equal Monthly Per-Person Dividends: Whereas equal monthly dividends (or “rebates”) from carbon fees paid to every American household can help ensure that families and individuals can afford the energy they need during the transition to a greenhouse gas-free economy and the dividends will stimulate the economy,

Therefore the following legislation is hereby enacted:

1. Collection of Carbon Fees/Carbon Fee Trust Fund: Upon enactment, impose a carbon fee on all fossil fuels and other greenhouse gases at the point where they first enter the economy. The fee shall be collected by the Treasury Department. The fee on that date shall be $15 per ton of CO2 equivalent emissions and result in equal charges for each ton of CO2 equivalent emissions potential in each type of fuel or greenhouse gas. The Department of Energy shall propose and promulgate regulations setting forth CO2 equivalent fees for other greenhouse gases including at a minimum methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons (HFCs), perfluorocarbons, and nitrogen trifluoride. The Treasury shall also collect the fees imposed upon the other greenhouse gases. All fees are to be placed in the Carbon Fees Trust Fund and be rebated 100% to American households as outlined below.

2. Emissions Reduction Targets: To align US emissions with the physical constraints identified by the Intergovernmental Panel on Climate Change (IPCC) to avoid irreversible climate change, the yearly increase in carbon fees including other greenhouse gases, shall be at least $10 per ton of CO2 equivalent each year. Annually, the Department of Energy shall determine whether an increase larger
than $10 per ton per year is needed to achieve program goals. Yearly price increases of at least $10 per year shall continue until total U.S. CO2-equivalent emissions have been reduced to 10% of U.S. CO2-equivalent emissions in 1990.

3. Equal Per-Person Monthly Dividend Payments: Equal monthly per-person dividend payments shall be made to all American households (½ payment per child under 18 years old, with a limit of 2 children per family) each month. The total value of all monthly dividend payments shall represent 100% of the total carbon fees collected per month.

4. Border Adjustments: In order to ensure there is no domestic or international incentive to relocate production of goods or services to regimes more permissive of greenhouse gas emissions, and thus encourage lower global emissions, Carbon-Fee-Equivalent Tariffs shall be charged for goods entering the U.S. from countries without comparable Carbon Fees/Carbon Pricing. Carbon-Fee-Equivalent Rebates shall be used to reduce the price of exports to such countries. The State Department will determine rebate amounts and exemptions if any.

 

Frequently Asked Questions (FAQs)

Why is Carbon Fee and Dividend Necessary?

This legislation will put us on the path of a sustainable climate by reducing our greenhouse gas emissions and transitioning us to a clean energy economy. Since the beginning of the industrial revolution we have increased the level of greenhouse gases, especially carbon dioxide (CO2), in our atmosphere. Scientists warn that this is having a drastic effect on our climate. Changes that would normally take thousands of years are happening in decades. Current concentrations of heat-trapping CO2 are higher than at any time in the entire history of the human species on Earth. In effect, we have covered the Earth with a large blanket of greenhouse gases and the Earth is warming up. The oceans are absorbing this increased carbon dioxide in the atmosphere, making them more acidic. Eventually, this acidity will affect the oceans’ ability to support life.

 

What is a carbon fee?

It is a fee based on the amount of carbon in a fossil fuel. Fossil fuels such as oil, gas and coal contain carbon. When burned they release the potent green house gas, carbon dioxide (CO2), into the atmosphere. The fee is based on the tons of carbon dioxide the fuel would generate, and it would be collected at the earliest point of entry into the economy — well, mine or port. The fee would start out low — $15 per ton — and gradually increase $10 each year.

 

What is the difference between a “tax” and a “fee”?

A tax has the primary purpose of raising revenue. By contrast, a fee recovers the cost of providing a service from a beneficiary. Since the CCL advocates for revenue-neutrality and a policy that doesn’t grow the government, we are advocating for a fee, not a tax. However, for purposes of discussion you will find carbon tax and carbon fee used interchangeably, and referring to the same type of legislation. This is fine, and don’t let it get in the way of the discussion. The tax or fee do the same thing, which is to include the damage that carbon is doing to our climate, oceans, and health in the price.

 

How much will the carbon fee affect energy prices?

The best example would be gasoline. A $1 per ton increase in the carbon fee would equal about 1 penny on the price of gas. So if the carbon tax started at $15/ton, gasoline would go up by about 15 cents per gallon the first year and 10 cents each year afterward.

 

What is the dividend?

The dividend is defined as the quantity of revenue to be rebated to American households. In this case, 100 percent of the total carbon fees collected are divided up and given back to all households equally. This dividend helps citizens pay the increased costs associated with the carbon fee while our nation transitions to a clean energy economy. Because not everyone uses the same amount of carbon, the majority of American households (about 66 percent) are estimated to earn back as much or more than they pay in increased costs [1].

[1] See our laser talk “Carbon Fee and Dividend” for greater details and references.

 

How does Carbon Fee and Dividend legislation work?

Carbon Fee and Dividend legislation puts a fee on the amount of carbon dioxide in fossil fuels. This fee is assessed at the source of the fuel: at the mine, well, or port of entry. The fee starts out low and increases annually in a predictable manner until we reach a safe level of emissions. The fee is collected exclusively at the first point of sale, and 100 percent of the revenues are reimbursed directly to all American households, shielding them from the financial impact of the transition to a clean energy economy. Because the fee (and the price of fossil fuel) goes up predictably over time, it sends a clear price signal to begin using fossil fuels more efficiently or replace them with low emissions energy. That price signal motivates investment to move into low emissions technologies, as the true cost of fossil fuels is brought back onto the balance sheets of those who sell them. The rising cost of fossil fuels increases the demand for low emissions products, making them even less expensive as they reach mass production. This clear and easy-to-understand price signal (increasing fossil fuel costs and decreasing green technology costs) drive the transition to a green economy. This transition will reduce greenhouse gas emissions, stabilizing our climate and the health of our oceans.

 

Won’t it be expensive to impose the fee?

No, for the two reasons listed below:

    1. The administrative & enforcement cost of collecting and processing a carbon fee is proportional to the number of fossil fuel firms that pay the fee. Collecting a carbon fee from a few hundred fee-payers, at a point where the fossil fuels enter the economy, is a relatively simple and low-cost activity. [Calder2015] and [Metcalf2009] suggest that — to keep the number of taxpayers to an absolute minimum — petroleum, coal, and gas fee collection be considered separately.

      a. There are far fewer petroleum refineries than petroleum well-heads, and the refineries are owned by fewer than 150 petroleum firms. It is these 150 firms that should be required to measure the output at their refineries and pay the fee.

      b. The approximately 1,500 U.S. coal mines are owned by between 500 and 800 coal producers. It is these producer firms that should be required to measure the output at their coal mines and pay the fee. There are four grades of coal, each of which has a slightly different carbon content, and therefore requires a different fee.

      c. There are over 450,000 natural gas wells in the U.S., but only 500 natural gas processing plants. It is the processors that should be required to measure their output and pay the fee. An additional advantage of collecting fees from processors (and refineries in the case of petroleum) is that the carbon content of processed outputs are easier to measure than unprocessed outputs.

      The total count of fee-payers is then between 1200 and 1500, a conveniently small, low-cost number.

    2. According to [Calder2015], “… use of existing tax mechanisms is probably the key advantage of upstream taxation”. An ‘excise’ is an existing tax mechanism assessed on a transaction to pay for a particular expense, and is most likely the least cost model for our new upstream carbon fee.The U.S. Internal Revenue Service has for years collected a per-ton excise from coal producers [IRS2005] and deposited the proceeds into the Black Lung Disability Trust Fund. The IRS also collects an “environmental excise tax” from petroleum firms for oil spill liability [IRS1993]. The excise procedures used to assess, collect and enforce these taxes could be extended and refined to assess an upstream carbon fee on the 1200-1500 fossil fuel firms described in 1 above. The carbon fee program could then be managed by existing IRS staff with perhaps some incremental hiring. [Calder2015] tells us that a carbon fee could assess, “different rates for different fuel types, [and] possibly credits or refunds for non-combustion uses”.Coal producers and petroleum firms are well-prepared to pay a carbon fee because they already measure their output and pay taxes on their fossil fuel sales. The IRS will have to extend the new carbon fee procedures to natural gas processors, and natural gas processors will have to measure their output (if they don’t already), calculate the carbon content of each output, and then determine their applicable carbon fees.

See the related CCL Laser talk the Administrative Cost of Carbon Fee and Dividend.

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References
[Calder2015] Jack Calder, Administration of a US Carbon Tax, Chapter 3 in Implementing a US Carbon Tax: Challenges and Debates edited by Ian Parry, Adele Morris, Roberton C. Williams III

[IRS2005] United States Internal Revenue Service, http://www.irs.gov/pub/irs-mssp/coal.pdf

[IRS1993] United States Internal Revenue Service, http://www.irs.gov/pub/irs-soi/93exenviro.pdf

[Metcalf2009] Gilbert Metcalf, David Weisbach, The Design of a Carbon Tax (Harvard Environmental Law Rev, 2009)

 

How is this legislation fair to businesses, utilities, manufacturers, services, farms?

By giving all of the carbon tax back to households — the end users — consumers will be able to pay the higher prices of goods and services caused by the higher price of fossil fuels. This allows businesses to pass along the increased cost and keep market share. Each year the carbon tax goes up, the dividend goes up as well. Everyone is on a level playing field for the first few years. But if businesses do not become more energy efficient and start converting to low-emissions energy, they will become less competitive and lose market share. These market forces will drive innovations in low-emissions technology, creating new business opportunities to develop, produce, install and service these products. This will create millions of new jobs here in America. American companies will be able to sell these technologies globally and American companies will become more efficient with the energy they use, making them more competitive worldwide.

 

Why will citizens change to low-emissions technologies if they are given a dividend to pay for the increasing price of fossil fuels?

With Carbon Fee and Dividend legislation, it is clear to citizens that prices for fossil fuels will go up every year. Part of their motivation is to save as much of their dividend check as possible rather than spending it on more expensive fossil fuels. They can do this by changing over to energy efficient lighting and appliances, upgrading their insulation or windows, replacing that old oil furnace with a geothermal heat pump, etc. When it comes time to get another vehicle, they would consider one that gets better gas mileage or an all-electric vehicle. They can then buy clean electricity (where available) through their utility to charge their car, getting them off fossil fuels altogether. The motivation is to reduce cost in the years to come. The same is true for investors and for fossil fuel companies: as the fee increases, and the cost of doing business rises with it, the rising dividend will ensure that the true cost of doing business will be paid by those in that business.

 

How will our manufacturers remain competitive?

The CCL legislative proposal calls for placing a border adjustment levy on all imports from countries that do not price carbon similarly, giving no company an incentive to move production to a country that allows them to pollute more at lower cost [2]. Because the US consumer economy is so much more valuable than any other in the world, foreign countries that export heavily to the US will likely choose to institute a similar carbon price, to avoid sending huge amounts of capital to the US. Either way, US and foreign manufacturers will lose no ground economically for producing products with a lower carbon footprint.

Additionally, the legislative proposal calls for rebating the border adjustment fee to American companies exporting to countries without similar carbon pricing, leveling the playing field for our companies and complying with the World Trade Organization (WTO).

[2] See our laser talk “Border Tax Adjustment” for greater details and references.

Why will the adoption of Carbon Fee and Dividend legislation put America in the leadership position on climate change?

Because of the carbon fee border adjustments, exporting countries will either adopt similar carbon pricing, or pay at our border. All countries that adopt similar taxes on carbon are on the same level playing field and can make border adjustments with countries that do not adopt such taxes. This encourages all countries to place similar taxes on carbon. As more nations adopt carbon taxes, worldwide demand brings the best green technologies to mass market faster, driving down costs and making the transition to a green economy less expensive for everyone.

 

What is green technology?

Green technology is any technology that reduces waste, increases energy efficiency, or produces low- or no-carbon energy. By reducing waste you actually save energy. Recycling aluminum cans for example, uses only about 5 percent of the energy needed to make aluminum from ore. Energy efficient technologies include Light-Emitting Diodes (LEDs) and Compact Florescent lighting, energy star appliances, efficient building design, high efficiency windows, hybrid and all electric cars, etc. Green technology includes those technologies that help us use fossil fuels more efficiently. Green energy (also know as clean energy) is energy produced by sources — solar, wind, wave, geothermal, – that do not contribute to total greenhouse gas emissions.

 

How many new jobs will be created if we adopt Carbon Fee and Dividend Legislation?

National employment increases by 2.1 million jobs after 10 years, and 2.8 million after 20 years. This is more than a 1% increase in total US employment we don’t get without Carbon Fee and Dividend!

See our laser talk “Job Results” for greater details and references.

 

What benefits will America receive by addressing climate change through Carbon Fee and Dividend legislation?

      1. We will stabilize our climate and oceans and slow down the mass extinction of species.
      2. It will put America in a position of leadership on climate legislation and in green technology. Governments will be forced to adopt the same carbon price levels as we do or pay at our ports for the privilege of polluting.
      3. It will decrease our dependence on foreign oil, substituting low-carbon energy made in the U.S. The U.S. spends billions annually on imported oil. When we substitute that for green energy made in America, it creates jobs.
      4. Decreasing our dependence on foreign oil increases our national security. Much of our military budget is spent protecting the free flow of oil and propping up the bad governments that control it.
      5. The transition to clean energy will clean our air of smog, ozone, fine particulate matter and other pollutants caused by burning fossil fuel. It will clean our lakes, rivers, and oceans from the mercury poisoning caused by burning coal, the leachates from coal mine tailings, and salt brines from drilling.
      6. We will gain a sense of national pride by tackling and achieving a tough goal together, leading the world not in the industrial revolution or the information age but in the Green Technology Revolution. Most of the green technologies we know of today were developed and tested in American laboratories only to be brought to market in other countries because those governments had national energy policies encouraging the adoption of green energy. We have already lost millions of jobs by holding on to the centuries-old technology of fossil fuels while other countries are transitioning to clean-energy economies. It is time we regained the lead.

 

Why is Carbon Fee and Dividend better than Cap and Trade?

Cap and Trade was used by some early signers of the Kyoto Protocol, the first international treaty to address climate change. Though most early adopters tried hard to make it work, Cap and Trade was not easy to understand, energy prices swung wildly, consumers paid the whole cost of the experiment, and it was not very effective in reducing total CO2 emissions. Much of the reason for this was because of offset credits. Power providers could buy offset credits that allowed them to burn more fossil fuels, but the offset credits did not actually reduce total CO2 emissions. Carbon traders and offset investors made lots of money. Utilities and manufacturers had increased costs that were passed on to the consumer. No real reduction in CO2 was achieved and the consumer was stuck with the bill. Carbon Fee and Dividend, on the other hand, is easy for everyone to understand, it gives the end consumer 100 percent of the proceeds of the carbon fee to help pay for the transition to clean energy, there are no offset credits or carbon credits to manipulate and no one technology is singled out to win or lose. Only with inaction over several years do you become disadvantaged. With action you become more efficient and competitive. The free market picks the winning and losing technologies. Low-emissions energy and efficiency measures become cost competitive as prices rise for fossil fuels. As we transition to green technologies and green energies, CO2 emissions are reduced. Investments in green energy spur the development of innovative technologies that we export to other countries. America regains leadership in the green revolution.

 

Why target a 90% reduction in 1990 emissions by 2050?

This target was set to keep warming below 2 degrees centigrade. The 2007 IPCC report (AR4*) contains a table for the emissions reductions relative to 1990 emissions necessary to stabilize the climate at different thresholds. The actual range in the report is 80-95% reduction below 1990 levels, so our target reflects the mean of those numbers plus a little cushion to be conservative and get a round number.

[4] Working Group 3, chapter 13. Ref this link for pdf download, page 776.

 

Why the CCL rate of increase in the carbon fee?

Basically, we’re aiming to achieve the IPCC goal of 80-95% emissions reductions below 1990 levels by 2050 [4]. If Carbon Fee and Dividend is enacted, CO2 emissions will decline 33% after 10 years and 52% after 20 years relative to 1990 levels. [5] While the IPCC report states that Annex I countries (which includes the US) need to achieve 25%-40% emissions reductions relative to 1990 by 2020, the CCL bill language allows for adjustments in the rate of increase to meet science-based emissions targets.

[4] IPCC AR4 Working Group 3, chapter 13. page 776.

[5] Regional Economic Modeling, Inc. and Synapse. Summary of “The Economic, Climate, Fiscal, Power, and Demographic Impact of a NationalFee-and-Dividend Carbon Tax.”

Why upstream?

A carbon tax may be assessed upstream (at the coal mine, oil well, or fracking site), mid-stream (at the power plants or oil refinery), or down-stream (at the gas pump or at the meter). The CCL has chosen an upstream point to collect the tax because it is simpler to administer and opens the possibility of keeping the carbon price for exports [7]. The export clause of the US Constitution (Art. I, Sec. 9) forbids domestic taxes from being included in exported products. However, there is case law that indicates a “severance fee” does not have to be refunded at the border. A carbon tax can only be considered a severance fee when it is assessed upstream. As climate change is a global problem, making the carbon fee stick to coal, in particular, which is exported abroad, is of interest in solving the global climate crisis. Assessing the fee upstream, while returning 100% of the revenues to households, allows the solution to span the entire marketplace, with no new bureaucracy.

[7] Astoria, Ross. “The Export Clause and the Constitutionality of a National Cap-and-Trade CO2 Mitigation Policy”. Forthcoming in Spring issue of the Georgetown International Environmental Law Review.

 

Why revenue neutral?

Academic papers studying a carbon tax indicate that a carbon tax with 100% revenue recycling can boost the economy, even before considering the economic benefits from improved health and less severe climate impacts [8]. Thus, CCL has chosen to advocate for a policy that will restore the climate
and boost the economy.

[8] See the laser talk “Economic Effect of a Carbon Tax” for more complete discussion and references.

 

Why a dividend?

Academic studies that consider the economic effect of a revenue-neutral carbon tax generally consider a dividend less beneficial (but still very beneficial) than a tax-swap [8]. A tax-swap means using the revenue to reduce any combination of payroll, income, or corporate taxes. However, these studies also say that though these tax-swap policies, especially corporate tax-swaps, result in a marginally larger economy, extra measures would have to be implemented to help the poor, because none of these tax-swaps will help the unemployed; including millions of retirees.
Because CCL values simplicity and transparency, because economists say the poor must be taken care of, because the difference in economic efficiency is marginal, and because a dividend will still boost the economy when health and climate benefits are accounted for, the CCL advocates for the only revenue return mechanism that reaches every American. Reaching everyone is indispensable for the success of any carbon price because when gas is $1.00 per gallon more expensive (year 10 in CCLs policy) [1], the poor will not be able to afford it with any of the tax-swap mechanisms of return, and the bill would be repealed. Only a dividend can simply, transparently, and fairly help everyone afford the price increases, ensuring support of the policy until we have restored the climate, and giving the Main Street economy time to adjust.

 

Why a border adjustment?

Though many other countries have carbon prices in some form [10], none of these are a match for the physics of the climate, and none employ a border adjustment [9]. Without a border adjustment, both American exporters and foreign importers would find themselves with an incentive to relocate production to countries with a more relaxed regime, polluting more for the same good. This is called “leakage”. In the interests of the climate, it is therefore necessary to refund the carbon fee on goods exported and impose a carbon fee on carbon intensive goods imported. While there are widespread concerns about how such a border adjustment could be compatible with World Trade Organization (WTO) law, these concerns are ill-founded. WTO experts have written documents explaining how this could be achieved, and it is clear that the CCL proposal is consistent with the requirements these experts outline [2].

[9] “Climate and Carbon: Aligning Prices and Policies”. October 2013. OECD Environment Policy Paper No. 1.

Why increase by a dollar amount?

There are three possibilities for increasing the carbon fee: increasing by a dollar amount, increasing by a percentage, or not increasing at all. CCL has chosen an annual dollar amount increase because of simplicity, effectiveness, and the economy.

Simplicity: it is easy to understand that the carbon price will be $15 in the first year, $25 in the second, and $35 in the third, etc. By contrast, you need a calculator to figure out that under S. 332, which uses a percentage increase, the carbon price is $20 in the first year, $21.12 in the second year,
and $22.30 in the third year [10].

Effectiveness: a dollar increase achieves substantial health and climate co-benefits at an earlier date. For example, there are $120 billion in mostly health-related costs incurred each year by the burning of fossil fuels [11]. Fewer emissions today means more lives saved today.

Economy: A carbon fee that doesn’t change in price and still enables us to meet emissions reductions targets needed for a stable climate would have an unwelcome effect on the economy. By contrast, a % increase would not give American businesses the price signal they need to be competitive with European and Chinese companies rapidly developing and deploying fossil-free technologies. A dollar increase strikes a balance between these two extremes.

[10] Senator Bernie Sanders. S. 332: “The Climate Protection Act of 2013”. Introduced Feb 14, 2013.

[11] See the laser talk “Health Effects” for more complete discussion and references.