Carbon Fee vs Carbon Tax: what’s the difference?

What is the difference between a carbon fee and dividend and a carbon tax?

By Katie Zakrzewski

For years, CCL has endorsed and supported a well-constructed carbon price known as a carbon fee and dividend. But as the carbon pricing discussion has picked up speed, politicians, media, and the public sometimes interchange the words “carbon fee and dividend” with “carbon tax.” 

While both a carbon fee and dividend and a carbon tax have many similar components, it’s important to note that they’re not necessarily the same thing — and that a carbon fee and dividend is much better.

The Basics of a Carbon Price

First, let’s understand the basics of any carbon price. Fossil fuels such as oil, natural gas, and coal all contain carbon. When burned, usually during manufacturing and production, these fossil fuels release potent greenhouse gases (GHG) and carbon dioxide (CO2) into the atmosphere. A carbon price, whether it’s designed as a fee or a tax, puts an extra dollar amount on those fossil fuels and their carbon pollution. A carbon price incentivizes businesses and people to switch to clean energy, services, and products.

Carbon Fee and Dividend

Putting a price on carbon involves placing a fee on these fossil fuels and carbon pollution. The carbon pricing fee is based on the metric tons of carbon dioxide (CO2) the fuel would generate, and it would be assessed at the earliest point of entry into the economy—as close as possible to the well, mine, or port. This carbon price flows through the economy, incentivizing businesses and people to switch to clean energy. CCL prefers a carbon fee and dividend over a cap and trade system. A cap and trade system requires additional bureaucracy to implement and run, and it creates price volatility that is difficult for businesses to keep up with. Additionally, this system contains many loopholes that allow polluters to pay to pollute. 

Not so with a carbon fee and dividend. 

CCL is a big proponent of a carbon fee coupled with a dividend component. A carbon fee puts a steadily rising fee on carbon-emitting fuels, at the source, where they are first introduced into the economy. This requires far less administrative red tape than a cap and trade system, and it gives businesses clarity so they can plan to transition to cleaner options. The money raised can be returned directly to households of American citizens, in a monthly dividend check. To be clear: the government does not keep any of the money raised from the fee. By definition, a fee is a payment in exchange for a service or privilege and is commonly used to describe a policy that does not grow the size of government. This makes carbon pricing policy a no-brainer for Republicans, who are often opposed to the implementation of taxes, and who value smaller government.

For over a decade, Citizens’ Climate Lobby has supported a carbon fee and dividend. Giving money to people so that they can afford a transition to clean energy makes a carbon fee fair and politically durable.

Carbon Fee vs Carbon Tax

Technically speaking, a tax has the primary purpose of raising revenue, usually for the government to use as they wish. If the government imposes a carbon tax, it’s implied that Congress would use the revenue for something potentially not even related to climate. CCL is advocating for a carbon fee, where the revenue does not go to the government but instead is returned in the form of a dividend to the American people.

Additionally, while many businesses and individuals pay compulsory taxes as a result of owning things and making purchases (actions that tend to be unavoidable), a fee is accrued as a result of going out of one’s way to do something. In this case, a fee is issued as a result of companies choosing to pollute when non-polluting alternatives are available instead.

George P. Shultz, who served as Secretary of State under President Ronald Reagan, and as Secretary of Treasury and Labor under President Nixon, laid out a conservative case in support of a carbon fee and dividend in a 2017 op-ed.

“[The] carbon dividend strategy has four interrelated elements that account for its strength: a gradually rising and revenue-neutral carbon tax; carbon dividend payments made equally to all Americans, to be funded using all the carbon-tax revenue; rollback of costly command-and-control regulations that were implemented because the environmental costs of carbon fuels have not been incorporated into their price; and border adjustment to ensure a level playing field and U.S. competitiveness,” he wrote. 

Shultz went on to write that the revenue gained from a carbon fee should not be “earmarked for any form of government spending or for the reduction of other taxes. Rather…it should be rebated as a monthly dividend equally to all Americans.”

CCL does not advocate for an ambiguous carbon tax; CCL advocates for a carbon fee and dividend. A carbon fee and dividend, therefore, not only limits pollution but also punishes polluters, helps businesses and the economy, and helps the Americans who need it most. 

Learn more about carbon pricing

Katie Zakrzewski, CCL Communications Coordinator, is an avid reader, writer and policy wonk. With published pieces, as well as podcast and radio appearances spanning the country, Zakrzewski looks forward to using her talents to create a healthier planet of tomorrow.