Carbon Fee and Dividend Policy and FAQs

Below you’ll find the full-text version of Citizens’ Climate Lobby’s preferred climate solution, known as Carbon Fee and Dividend. A national, revenue-neutral carbon fee-and-dividend system (CF&D) would place a predictable, steadily rising price on carbon, with all fees collected minus administrative costs returned to households as a monthly energy dividend.

In just 20 years, studies show, such a system could reduce carbon emissions to 50% of 1990 levels while adding 2.8 million jobs to the American economy.

Carbon Fee and Dividend Policy

Download the full-text version or see answers to frequently asked questions.

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 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 net 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

1. Why is climate legislation necessary?

Legislation is needed to put us on the path of a sustainable climate by reducing our greenhouse gas emissions and transitioning us to a sustainable 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 disrupting the global climate in which all human civilization developed. Changes that would normally take thousands of years are happening in decades. The concentration of heat-trapping CO2 is already higher than at any time in the entire history of the human species. The resulting climatic changes are expected to create massive disruptions and dislocations. The oceans are absorbing much of this increased CO2  from the atmosphere, making them more acidic, which eventually could seriously degrade the oceans’ ability to support life.

 

2. What is a Carbon Fee?

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

 

3. What is the difference between a ‘tax’ and a ‘fee’?

A tax has the primary purpose of raising revenue. By contrast, a fee is a payment in exchange for a service or privilege. Since CCL advocates for revenue neutrality and a policy that doesn’t grow the government, it’s reasonable to characterize our carbon price as a fee rather than 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. Regardless of the word used, the point is to make fossil fuels include the real costs they are imposing on our climate, oceans, and health.

 

4. How much will the Carbon Fee affect energy prices?

There are some forms of energy we buy directly, like gasoline and electricity. As a rule of thumb, each $10 per metric ton Carbon Fee would add about 11¢ to a gallon of gasoline, about 6¢ to a therm of natural gas, and 0.9¢ to a kilowatt-hour of coal-generated electricity. Energy costs are also embedded in most products and services we consume, so those would increase in price depending on carbon footprint, ranging from 0.2 percent for a TV to 1.1 percent for an airplane ticket (for each $10/metric ton increase).

 

5. What is the Carbon Dividend?

The Dividend is defined as the quantity of revenue to be rebated to American households. In this case, the total Carbon Fees collected minus administrative costs are divided up and given back to all households on an equal per-person basis. This Dividend helps U.S. residents 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 Americans (about 58 percent) are estimated to earn back as much or more than they pay in increased costs .

See our laser talk Carbon Fee and Dividend for greater details and references.

 

6. Won’t it be expensive to impose the Fee and pay the Dividend?

No, the simplicity of this plan will make its overhead costs very low. There are four main reasons:

  1. For Carbon Fee assessment, the fee is linked to the tons of fuel sold into the system and the percent of carbon in each fuel, both of which are already measured routinely by producers to verify the amount and quality of what they’re selling. Most of these measurements are automated and provide the basis for commercial transactions between sellers and buyers, and also for remittances to state and local taxing authorities.
  2. Depending on how the legislation assigns responsibility for payment of the Carbon Fee, the number of tax-paying entities will be relatively small — far less than the 250 million that the IRS must process. For coal, there are about 850 mines and about 500 preparation plants that will be the likely Fee payers. For oil and gas, there are about 60,000 metering locations or other documented sales points. Those data can be passed downstream to about 630 refineries and gas treatment plants that take in the raw fossil fuels to process them into usable products. In all, it’s likely that the number of fee-paying entities would be on the order of 1200 to 1500 *  – a drop in the bucket compared to all of the tax assessment responsibilities of the federal government today – and can use existing tax mechanisms.**
  3. Dividend distribution will also be far simpler and cheaper than other federal payouts like those for income tax refunds, social security payments, Medicare payments, etc., because every adult and child, respectively gets the same amount. Recipient names and locations are already available in the IRS database. Well over 90% of American adults have bank accounts that can receive electronic payments, which are very cheap to make.

* Metcalf, G. and D. Weisbach (2009).

** Calder, J., Chap. 3 in Implementing a US Carbon Tax (2015).

See our Laser talk Administrative Cost for more details and references.

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

By giving all of the net revenue back to households — the end users — most 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 Fee goes up, the Dividend goes up as well. Everyone is on a level playing field so businesses who do not become more energy efficient and start converting to low-emissions energy will become less competitive and risk losing 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 at home. 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.

 

8. Why will consumers change to low-emissions technologies if they are given a Carbon Dividend to pay for the increasing price of fossil fuels?

With Carbon Fee and Dividend legislation, it is clear to consumers that prices for fossil fuels will go up every year. We know that when a product or service gets more expensive, consumers will look for ways to use less of it – remember that the Dividend payment is independent of how much energy the household uses. Everyone will be motivated to spend less on increasingly 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 even buy renewable 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 going to their customers will ensure that the true cost of doing business will be paid by those in that business.

 

9. How will our manufacturers remain competitive?

The CCL legislative proposal calls for levying a Border Carbon Adjustment on carbon-intensive trade-exposed imports from countries that do not price carbon similarly. This kills any incentive for U.S. companies to move production to a country that allows them to pollute more at lower cost. Because the U.S. consumer economy is so much more valuable than any other in the world, foreign countries that export heavily to the U.S. will likely choose to institute a similar carbon price, to avoid sending huge amounts of capital to the U.S. Either way, U.S. 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 Carbon Adjustment to American companies exporting carbon-intensive trade-exposed goods, leveling the playing field for our companies and complying with World Trade Organization (WTO) rules.

See our laser talk Border Carbon Adjustment for more details and references.

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

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

 

11. What is meant by terms such as ‘clean’, ‘green’, ‘low-carbon’, and ‘sustainable’ energy?

These terms are often used interchangeably, but there are differences. ‘Clean’ energy is a broad term referring to technologies that are low- or non-polluting with respect to greenhouse gases and/or air pollutants like particulates and smog, or even water pollution and solid wastes. ‘Green’ is an even broader term that is used in many different contexts to denote low environmental impacts, energy efficiency, low toxicity, or even just containing natural substances. ‘Low-carbon’ energy is more specific in denoting energy that reduces or eliminates greenhouse gas emissions; besides renewables like wind, solar, and hydropower, this term could encompass nuclear energy or fossil energy with CO2 capture and storage. ‘Sustainable’ energy means technologies that could be used far into the future without unacceptable impacts.

 

12. How many new jobs will be created if we adopt Carbon Fee and Dividend legislation?

According to the REMI study that was published in 2014, national employment will increase 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 The REMI Study for more details and references.

 

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

We will stabilize our climate and oceans and slow down the mass extinction of species. We will put America in a position of leadership on climate legislation and in technology innovation for the future. Governments will be compelled to adopt the same carbon price levels as we do or pay at our ports for the privilege of polluting. We will eliminate our dependence on foreign oil and the need to prop up many unsavory governments that control it, substituting low-carbon energy that creates prosperity in the U.S. The transition to non-fossil energy will clean our air of smog, ozone, fine particulate matter, and other pollutants caused by burning coal and oil. It will clean our lakes, rivers, and oceans from mercury and other toxins from coal burning as well as oil spills and water pollution from the use of oil.

We will gain a sense of national pride by tackling and achieving a tough goal together, leading the world in addressing climate change. Most of today’s sustainable technologies were developed and tested in American laboratories, only to be brought to market in other countries because those governments had national energy policies encouraging their adoption. 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.

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

Cap and trade, also called ‘emissions trading’, works by setting a ‘cap’ – a maximum for total emissions within a sector – and then selling and trading permits for the right to pollute up to that cap, which is periodically lowered. It has worked well for pollutants like sulfur gases, but carbon is a different story. Unlike sulfur – an unwanted contaminant – carbon is what gives a fuel most of its energy. It’s emitted not just from huge power plants, but from a billion smaller sources like cars, trucks, trains and planes. Cap and trade requires bureaucracy to select which companies get covered, and the emissions must be measured, reported and verified. The carbon price is bid up and down by market traders, adding another layer of cost. The resulting price volatility creates uncertainty for businesses and investors, stalling decisions to undertake the big projects needed to slash emissions.

Carbon Fee and Dividend is far simpler. It can cover all fossil fuels and all emitters regardless of size — including vehicles. It’s easy to understand and monitor. It more easily lends itself to cross-border policy alignment. Administrative costs for both government and industry are far lower.

Cap and trade proponents tout their policy as ‘market-friendly’, but Carbon Fee and Dividend fits that description better, with less bureaucracy, lower costs, and more predictability.

See our laser talk Carbon Fee Versus Cap and Trade for more details and references.

15. Why target a 90% reduction from 1990 emissions by 2050?

CCL aims to achieve the IPCC goal of 80-95 percent emissions reductions below 1990 levels by 2050*. If Carbon Fee and Dividend is enacted, according to the REMI study, CO2 emissions will decline 33 percent after 10 years and 52 percent after 20 years relative to 1990 levels. This trajectory is roughly consistent with a 90 percent reduction by mid-century. While the IPCC report states that Annex I countries (which includes the US) need to achieve 25-40 percent 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.

IPCC AR4 Working Group 3, chapter 13. page 776.

See our laser talk The REMI Study for more details and references.

 

16. Why the CCL rate of increase in the Carbon Fee?

CCL aims to achieve the IPCC goal of 80-95 percent emissions reductions below 1990 levels by 2050*. If Carbon Fee and Dividend is enacted, according to the REMI study, CO2 emissions will decline 33 percent after 10 years and 52 percent after 20 years relative to 1990 levels. This trajectory is roughly consistent with a 90 percent reduction by mid-century. While the IPCC report states that Annex I countries (which includes the US) need to achieve 25-40 percent 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.

IPCC AR4 Working Group 3, chapter 13. page 776.

See our laser talk The REMI Study for more details and references.

17. Why assess the Fee upstream?

A carbon tax may be assessed upstream (near the coal mine, oil well, or gas well), mid-stream (at the coal prep plant, oil refinery, or gas processing plant), or downstream (at the gasoline pump, power plant, or gas meter). The CCL proposal has chosen an upstream point to collect the tax because it is simpler to administer and complies with a constitutional requirement to keep the carbon price in place for exports. The export clause of the U.S. 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 Fee 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 U.S. companies export in significant amounts, is important to solve the global climate crisis. Assessing the fee upstream, while returning 100 percent of net revenues to households, allows the solution to span the entire marketplace, without simply moving the problem to other countries.

18. Why revenue neutral?

Academic papers studying a carbon tax indicate that 100 percent revenue recycling can boost the economy and result in a more efficient mix of energy innovations, even before considering the economic benefits from improved health and less severe climate impacts. Thus, CCL has chosen to advocate for a policy that will restore the climate and boost the economy.

See our laser talks Revenue Neutrality and Economic Impacts of Pricing Carbon for more details and references.

19. Why a Carbon Dividend?

Academic studies that consider the economic effect of a revenue-neutral carbon fee generally consider a dividend to be less ’economically efficient’ than an approach known as a ‘tax swap’. A tax swap means using the revenue to reduce some combination of payroll, income, or corporate taxes. However, the term ‘economically efficient’ can be misleading. Although tax-swap policies, especially corporate tax swaps, result in a marginally larger economy overall, they may result in undue burden on low-income Americans and the unemployed, including millions of retirees. It is also difficult in practice to achieve revenue neutrality through tax swaps while steadily increasing the amount of the carbon fee, as needed to achieve steady and deep reductions in emissions, because that would require constant adjustments in the size and placement of the tax offsets, not to mention the difficulty in tracking the actual amounts of revenue flows.

Because CCL values simplicity and transparency and will not accept a regressive outcome that unduly burdens the poor; 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, Citizens’ Climate Lobby advocates for the only revenue return mechanism that reaches every American. Reaching everyone is indispensable for the success of any carbon price for reasons of both fairness and political durability. A law that creates hardship for low- and middle-income Americans would almost certainly be repealed. Only a Carbon 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.

20. Why a Border Carbon Adjustment?

Though many other countries have carbon prices in some form, none of these are a match for the physics of the climate, and none employ a Border Carbon Adjustment. Without such an adjustment, 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 product. This is called ‘carbon 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. CCL has determined how such an adjustment can be compatible with World Trade Organization (WTO) rules.

See our laser talk Border Carbon Adjustment for more details and references.

21. Why increase the Carbon Fee by a dollar amount?

There are three possibilities for increasing the Carbon Fee: (a) increasing by a dollar amount, (b) increasing by a percentage over inflation, or (c) not increasing at all. CCL has chosen an annual dollar amount increase because of simplicity and effectiveness.

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, a percentage increase over inflation is less clear and less predictable for consumers and businesses.

Effectiveness: A carbon fee that doesn’t change but is still high enough to meet emissions reductions targets needed for a stable climate would be very tough on the economy, and a low carbon fee that didn’t 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 fixed, simple dollar increase strikes a balance between these two extremes.

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Carbon Fee and Dividend Policy and FAQs,
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