By Mike Shatzkin
There is currently a bill before the US Congress that could be the most significant climate legislation ever passed. It institutes a concept called “carbon-fee-and-dividend”, which is not really a “new” idea but which is still a pretty obscure one. It shouldn’t be. Anybody worried about climate change should familiarize themselves with the idea, which might be the single most powerful policy tool we can create to decarbonize our energy systems.
What is “carbon-fee-and-dividend”?
It is a protocol to “put a price on carbon” and refund the money raised in equal shares to individuals.
The “fee” is a price paid by the provider of raw material that will be burned and create CO2 (meaning coal, oil, or gas) when that material enters the economy: at the mine, wellhead, or port. That becomes part of the cost of the raw material and raises the price of the finished product (“fuel”) that results from it. The “dividend” is paid to the public: a pro-rata share of one hundred percent of the proceeds from the fees. So the costs are paid by all consumers of fossil fuel energy: governments, businesses, and people. But the dividends are divided equally among people. That creates a very progressive result.
Who has proposed it and how do proposals for it differ from each other?
The longest continuing advocates of the carbon-fee-and-dividend idea (and the people who named it “carbon fee and dividend” — hey: it might have been called “carbon tax and refund”) have been the non-partisan Citizens’ Climate Lobby, which has been pushing their version of this idea for over a decade.
In February of 2017, an avowedly Republican group, fronted by former GOP Cabinet Secretaries James Baker and George Schultz and called Climate Leadership Council, put forward their version of the idea.
Shortly thereafter, Americans for Carbon Dividends were formed under the bipartisan leadership of ex-Senators Breaux (D) and Lott (R).
Finally, a bill was put before Congress proposing a pure CFD in the waning lame duck days of the previous Congress. Now, the current Congress has HR 763, the Energy Innovation and Carbon Dividend Act of 2019, proposed by Representative Ted Deutch FL-22 (and a host of co-sponsors which, as of this writing, includes one Republican: Francis Rooney FL-19). This is the first time that a full Congress will have the chance to consider this concept as legislation.
There are several “moving parts” to the CFD concept.
1. How much is the fee? It is based on tons of CO2 that will result from burning the fuel, so coal is more “costly” than oil or gas. Starting points for the various proposals range from $15 a ton to $40 a ton of CO2. That would translate into roughly 15 cents or 40 cents a gallon of gasoline, as a way to “visualize” the impact of the fee on consumers. It would, of course, also raise the price of all other fossil-fuel-driven energy, including heating or electricity.
2. How much is the fee “set” to rise? The original (and current) Citizens’ Climate Lobby proposal was to start the fee at $15 a ton and have it rise by $10 a year forever. The Climate Leadership Council idea was to start at $40 and have it rise only with inflation thereafter. It is an open question how much this decision matters in the initial legislation. CFD will create its own new realities, including checks flowing to every household, that will affect how attractive it looks to voters in the future, and how much it will rise is far more likely to depend on that than on the initial legislation.
3. If the intention is to divide the revenue equally among “everybody”, how do we define “everybody”? CCL says everybody is every resident. CLC says it is every taxpaying family. Some formulas count kids as 1/2 an adult, some cap each “household” at 3 total shares (2 adults and 2 one-half-share kids), apparently reflecting a desire not to reward large households in a resource-constrained world.
There will be two important social effects of this policy. One is that energy sources that are not emitting CO2 will be economically favored. The electric car will look like a better investment and the gas-guzzler will look worse. The payoff from investing in solar panels will be relatively greater. Industrial investors in power will avoid years of carbon fees by switching to renewables. And nuclear plants which are being closed as “unprofitable” will suddenly find they are economically competitive with fossil-fuel energy sources and remain open. The “fee” will result in the market pushing us toward less CO2.
But the other profound social effect is that everybody will start to get a check, or a bank credit, on a monthly basis. Some people — particularly a person who lives in a small space in a city and uses public transportation — will really profit from this payment. Very little of their life costs will rise against it. For others it will easily replace the the increase in their gas pump costs or electric bill. The ones who will pay the most for energy — industrial users, people who fly on airplanes a lot, people who heat or cool very large spaces or many spaces — will pay the biggest cost. In other words, the “dividend” is going to have a very progressive overall impact.
As if to underscore the progressive nature of the dividend concept, HR 763 introduces the wrinkle of making the first “estimated” dividend payment a month before the fee is levied and starts percolating through the supply chain. So the people who really need the dividend to cover the increased costs of the fee will have the cash in hand before they have to start paying.
Why is CFD the “preferred solution for putting a price on carbon”?
It is important to remember that what distinguishes CFD is the “dividend”, not the “fee”. The “fee” is simply a tax on carbon, which is called a fee because a) the government doesn’t keep the money for any other purpose but simply refunds it and b) the word “tax” turns a lot of people off before they go any further in the conversation.
But the “dividend” is critical. It is progressive, because those who spend more on energy (usually a sign of affluence) get exactly the same “dividend” as the poorest person with the smallest of carbon footprints. That means it amounts to a “guaranteed annual income”, surely recognizable as a progressive idea.
There are two specific reasons that CFD is the best next step for the climate-concerned.
One is that it is, by far, the easiest proposal to pass for putting a price on carbon. No mere “tax” is going to gain Republican support at any level, and CFD has endorsement from GOP elder statesmen and many former GOP officeholders.
In fact, it is liberals, many of them longtime climate activists and advocates for taxing carbon, who often resist the dividend concept because they already had ideas about what to do with the money. They want it used to fund green energy or “climate justice”. There’s nothing really wrong with that idea, but it is politically fraught.
Washington State has failed repeatedly to tax carbon, even with the support of prominent elected officials in the State and division about how the money would be used is a big part of the problem. And the “Yellow Jacket” protests in France would not be taking place, one imagines, if all those demonstrators were getting a monthly check for their share of the French taxes on petrol that more than covered it.
So CFD is easier to pass and less likely to foster resistance once in place. In fact, estimates are that 70 percent or more of individuals will “profit” from CFD: the dividend payments they will receive will be greater than the energy costs created by the fee. So, in fact, raising the level of the fee over time should have widespread support since it will also raise the dividend payments from which most people are profiting.
So climate activists, for the first time in a long time, have a meaningful piece of legislation to rally behind, legislation that can really change the political equations around decarbonizing our energy system. We all have to learn about the virtues of carbon-fee-and-dividend and HR 763.