The benefits of distributing carbon fees as dividends and the nuanced differences between various plans

by Mike Shatzkin

There are at least three entities pushing a version of the same basic idea, which is to tax (although none of them use that word: it’s not a “tax”, it’s a “fee”) the CO2 resulting from burning fossil fuels and refunding the money as a guaranteed annual income (although none of them say that either: it’s a “dividend”) to either “residents” or “taxpayers” (a nuanced difference between competing schemes).

Citizens’ Climate Lobby (CCL) is a non-partisan group that has been pushing their version for more than a decade. Climate Leadership Council (CLC) calls their version a “Republican” solution and touts that it was created by Republican luminaries James Baker and George Shultz, with an assist from leading GOP economists Gregory Mankiw and Martin Feldstein. And now we have a new group with a bi-partisan face (former Democratic Senator John Breaux and former Republican Senator Trent Lott) called Americans for Carbon Dividends (AFCD) supporting the CLC solution.

The differences between the two plans are subtle. CCL wants to start at $15 a ton of CO2 (equivalent to 15 cents a gallon of gas) with built-in increases of $10 a year forever. And they want to distribute the revenue received equally to all residents of the US. The CLC and AFCD version sets the fee at $40 to begin (40 cents a gallon) and it rises only with inflation after that. And their plan for distribution is to taxpayers, not residents.

Before we analyze the differences between the approaches and focus on what’s most important, we must acknowledge that none has much political traction. Despite CLC and AFCD having lined up some impressive support from old-line conservatives and the fossil fuel industry itself, today’s elected Republicans have been prominently absent from its endorser list and none has expressed any interest in promoting it.

And there isn’t a lot of enthusiasm evident for the “dividend” idea among environmental activists either. CCL may be seen as a bunch of “tree-huggers” by the Republicans, but they’ve also failed to enlist much outspoken support from the rest of the “tax carbon” community, which has its own ideas — some of them quite sensible — about how the revenues from putting a price on carbon ought to be divided. Just handing back the money to people in equal amounts means we as a society will need to create other revenue sources to subsidize renewables or batteries, or to address “environmental justice”, a concept that acknowledges the unfair and uneven distribution of the burden of well over a century of degradation caused by fossil fuel energy.

As I count them — and leaving aside the issue of carbon “cap” versus carbon “tax” — there are four moving parts to this conversation.

1. What do you do with the money raised? I am advocating a full dividend for a very simple reason. Wherever we start the tax it is likely that science and circumstances (warming earth, rising seas) will make us want to raise it. Full dividend, because 2/3 of the people get more money back than the tax costs them, builds in the support for further increases. It’s worth noting that, whatever one thinks about the “fairness”, returning the money to “taxpayers” rather than “residents” does more to promote the concept politically.
2. How high is the tax when it starts? From my perspective, and because the amount of the dividend goes up with the amount of the tax, the higher the better for the starting point. I suppose there is a theoretical possibility that the tax could start so high that it would be disruptive, but that would be in some different universe than the one we currently occupy. The CLC-AFCD proposal starts at $40 a ton of CO2 (which will add about 40 cents a gallon at the pump) and the CCL proposal starts at $15 a ton (or 15 cents a gallon).
3. Does the initial tax-and-dividend proposal have built-in increases in the tax for the future? This is the big structural difference between the current proposals. CCL’s calls for increases in the fee of $10 a year. CLC-AFCD only build in modest increases to account for inflation. How important it is to get the increases into the initial legislation depends a great deal on how much faith one has in the “flywheel” effect postulated above: that with people making money on it, it will be easy to raise the rate. But even if you believe, as I do, that future increases will not be hard to achieve with any evidence at all that they are environmentally mandated, it is true that having them built into the initial implementation will affect planning and investment in renewables and energy storage.
4. The CLC and AFCD proposals call both for eliminating Clean Power regulations and relieving fossil fuel companies of tort liability for the damage they’ve already done. I am told by people whose opinions I respect that charging the fee at the $40 level will be much more effective than any regulations now on the books, so that trade-off is acceptable, and actually a “win”. As for the tort liability, my instinct is “sure, except in case of fraud”. Frankly, I don’t think legislators would write in a defense of fraud and I’m not sure it would be enforceable if they did.

Even among those who already accept the political benefits we get if we forego the subsidies for new technology or environmental justice and go for full dividend, there is room for disagreement about what constitutes the best action to take right now. It has seemed to me that the CLC and AFCD were the horses to bet on, for two reasons. One is my hunch that starting full dividend at $40 will be more effective from the start and lead to more increases faster than the CLC proposal that builds in the increases but doesn’t get past $40 until the fourth year. And the other is my belief that if liberals and environmentalists would “just say yes” to a Republican-formulated plan, it would have a better chance to pass sooner than what CCL has been pushing, without much success, for over a decade.

But those are hunches and beliefs, not empirical facts. In a recent discussion with Dan Miller of The Roda Group, whose TEDx presentation on this subject is terrific and who has been tracking and thinking about this issue far longer than I have, he pushed back hard against both of my assumptions. He thinks the mandated increases will really change behavior from the moment they’re passed. And he doesn’t take the Republican “support” for the other ideas very seriously, since there are no actually now-sitting Republican legislators or office-holders among the endorsers. He thinks the right approach is to keep pushing for the CCL formula, which he reckons has just as much chance to pass just as quickly.

But what we agree on is that we would be delighted to support either version the minute it exists as legislation. Our disagreement about the substance (I’d rather start at $40 without the increases than at $15 with them) is minor to both of us in relation to the urgency of the overall solution.

In an exchange about this piece, Dan said “ I argue that CCL’s plan will have lower emissions even in the first 3 years since it is the actions of utilities and other industry groups (e.g., cement and steel) that will cause the bulk of the emissions reductions, not individual actions. The $100 future fee will get industry to act more boldly right now than the $40 fee.”

But my response is that the utilities and other industry groups will start to get the signal very quickly that this tax is going up. I expect to be shoulder-to-shoulder with Dan and a lot of environmentalists campaigning for an increase in the fee the day the first quarterly dividend checks are mailed out. Nothing speaks as powerfully to anybody as a check, and every voter’s family will be getting one worth cashing from the very beginning with the $40 fee and the urgency of the increases Dan wants will be no less then than they are now.

What is important among those of us on the “left” — meaning those of us who are believers that we must curtail the burning fossil of fuels to save civilization — is to agree that CO2 is the urgent enemy and we need to focus on finding a long term answer to that. Only full dividend builds the political momentum we’ll need to do anything more than pass one bill.

We definitely need investment capital for new technology and to redress longstanding environmental discrimination. But we make a mistake if we let that goal interfere with what must be the primary one. We have to put a price on carbon in a way that builds political support for continuing to raise it until we have achieved the objective of a sustainable energy system based on renewables, storage, and conservation, not on burning fossil fuels.

This is a related piece aggressively making the case that liberals and Democrats should support the CLC-AFCD policy.