Revenue Neutral Carbon Fee and Dividend: Bending the Emissions Curve by CitizensClimateLobby
A revenue neutral, rising fee on GHG emissions will steer the economy to a low-carbon future and re-establish US climate leadership.
"It is not necessary to do extraordinary things to get extraordinary results."-- Warren Buffett
“It's not a tax if the government doesn't keep the money.” -- George P. Shultz, former U.S. Secretary of State and Treasury (1)
An effective global carbon price must harness the global economy by engaging markets across local, national and international boundaries. However, there is no universal mechanism for pricing carbon or a unified carbon trading system.
The most effective policy to achieve these goals is a predictably rising, revenue-neutral carbon fee (RNCF), or "tax," plus border carbon adjustments which internalizes the real costs of carbon-based fuels, rapidly reduces emissions, spurs investment, aligns global carbon pricing and is politically viable.
1. Border carbon adjustments (BCA’s), imposed on imports of fossil fuels and primary products of energy-intensive industries from nations without a carbon price, will create a level playing field for exporters and motivate other countries to adopt comparable emission-reduction and pricing strategies. The BCA can become the common critical mechanism that harmonizies worldwide carbon pricing.
3. Recycling of the funds, via direct payments to citizens and/or tax swaps, can survive the current anti-tax environment, inject billions into the mainstream economy and generate political popularity.
4. No increase in government revenues or new bureaucracies are required to implement a RNCF.
5. Predictability: A predictably rising price on GHG emissions sends clear market signals to investors and dampens market volatility.
Is this proposal for a practice or a project?
What actions do you propose?
A steadily rising carbon fee facilitates long term low carbon investment, unimpeded by unforeseen economic and energy factors or by regulatory policies that undermine cap and trade carbon allowance prices.
We propose using existing systems to impose a modest fee on the embedded CO2 content of fossil fuels starting at $15/ton of eventual emissions, escalating steeply by $10/t/y, sending a robust price signal to global markets while allowing ample lead time for businesses to adapt.
Revenues, less administrative overhead, are returned to households in regular cash dividends.
Applying the fee at a discrete number of production or import sites affords lower administrative costs and complexities than under a cap system. Other important GHG's such as, HFC's, NOx, etc., should be included.
Border fees, consistent with WTO/GATT regulations, are imposed (p15.d) on imports of basic materials from countries without similar carbon pricing policies. U.S. exporters to nations not pricing carbon will be eligible for rebates to compensate for their increased production costs. Firms seeking to escape higher energy costs will be discouraged from relocating to non-compliant nations (“leakage”), as their products will be subject to import fees.
Congress will determine the mix of direct dividend return and/or tax swaps, eligibility for the dividend, distribution methods, how to prevent fraud and whether the direct dividend is taxable.
The fee can rise steeply without hurting the economy
Recent Congressional proposals have been conservative in their rate of fee increase out of legitimate concern for negative impacts, advocating a higher starting fee aligned with the current social cost of carbon (SCC) and slower escalation linked to the inflation rate. Anticipated benefits include economic growth, reduced budget deficits, reduced redundant and inefficient regulations, subsidies, costs of climate change and reductions of distortionary taxes on capital income and labor.
But the necessary strong price signals will be tolerable only by avoiding undue economic pain for citizens. The supposed regressive effects of carbon pricing assume the government keeps the money, not 100% fee recycling.
Carbon Tax Center's Model using CCL's parameters:
Lower income families won't bear an undue burden US Treasury, Office of Tax Analysis
Streamline Regulations and Subsidies
The RNCF shapes billions of industry and consumer decisions. As the energy playing field levels, gradual elimination of most energy subsidies will become possible as every fuel and every product's carbon footprint will be accountable.
Regulatory programs will still be needed where the market and pricing do not penetrate sufficiently to alter decisions, or non-market factors interfere, e.g., rental buildings where landlord and tenant incentives are not aligned.
Tax swaps vs. full dividend return
Some proposals offset the fee with swaps for corporate and payroll taxes ("a tax for a tax”), but empirical evidence of their effect is mixed. The Reagan and G. W. Bush tax cuts resulted in no additional growth stimulus — only historical growth in the 1980s and less in the 2000s. Clinton’s tax increases had no adverse impact on growth.
So which is preferable?
Corporate tax cuts are no guarantee that the funds will be allocated to decarbonization. Recent history indicates a decline in corporate profits going to investment, instead going to compensate shareholders, buy back shares, enrich management and build cash positions. They've also been offshored to avoid taxes rather than being invested in productive activity, including low carbon investments.
A payroll tax cut would not benefit retired workers, students, stay at home parents or the unemployed. It would also weaken the financing of social security.
But the steeply rising price signal that clearly necessitates low-carbon investment will be tolerated by the public only if household budgets are protected by a cash dividend. That's the key to political stability.
Another concern is that as the carbon fee accomplishes its objective, revenues will taper off. If the rising fee offsets taxes, long-term budget shortfalls will occur. Who then will raise taxes to rebalance the federal ledger?
Critically important will be the public’s understanding and confidence in the policy and its impacts: winners, losers, immediate and long-term impacts on regions, localities and emissions. It must be perceived as fair, effective and fully accountable.
Returning revenues to the public is also politically savvy, blunting the “No New Taxes” demand that has held sway in American politics for decades, making it more acceptable to predictably raise the carbon fee over time. The check-in-hand household dividend acts as a Main Street stimulus which may better address chronic lack of demand in the economy than a tax cut.
Harmonizing carbon pricing across specific industries
With the upstream fee, no one sector is "unfairly" singled out for regulation nor allowed a free ride. The signal is economy-wide, from producer to consumer. An upstream carbon levy simplifies the process of assessing current and future costs of all activities that emit carbon. That price signal nudges myriad individual actions in the direction of lower carbon intensity.
R&D, Tax Reform
Revenue neutrality requires critical government funding to continue flowing through existing channels, -- DOE, DARPA, etc. The steadily rising carbon fee can also be the missing key to unleashing and stabilizing private sector R&D in the decarbonization transition.
Likewise, the RNCF should be considered entirely separate from tax reform, as the intention is not to politicize the revenue stream.
Demand Destruction: Paris and the Border Carbon Adjustment
In Paris, the world’s nations aspired to decarbonize their economies. However, treaties without enforcement, like Kyoto and Paris, are only aspirational. Even the diplomats acknowledge that the Paris goals are too weak to avoid calamity, and the US President has now signaled intent to withdraw.
However, as long as international trade continues, the gears of the global economic machine can still be engaged to the task of "transparently assured fossil fuel demand destruction."
Economist Martin Weitzman observes: "Negotiating a single internationally-binding minimum carbon price (the proceeds from which are domestically retained) counters self-interest by incentivizing agents to internalize the externality...For enforcement, perhaps there is no practical alternative to using the international trading system for applying tariff-based penalties on imports from non-complying nations.”
The BCA will motivate developing countries to establish comparable carbon pricing to avoid paying U.S. carbon duties, keep the revenues for themselves and maintain their favorable trading relationships with the U.S. and other countries that establish a harmonized carbon price and BCA. For the poorest 50 developing countries, which account for approximately 10% of global emissions, a 5-10 year exemption could be considered.
Establishment of the BCA can even be as simple as a 5% carbon tariff on import content or more simply a 2% carbon penalty tariff on all imports from countries that are "free riders" without comparable carbon pricing.
A border adjustment as an enforcement mechanism has the highest chance of achieving a harmonized global price and addressing the free-rider problem. Countries over time will not likely forego the largest open global market -- the U.S. In any case, harm to U.S. industries will be minimized by the BCA.
Addressing issues of political economy
In the U.S., the political economy barriers imagined are less than meet the eye.
First, fee & dividend is not burdened with the fatal characteristics of Waxman-Markey’s cap & trade, passed with a fragile, partisan inside-the- beltway coalition unable to explain or sell it to the public. CCL has instead developed decentralized support across all congressional districts for an understandable, transparent proposal.
Second, the generous (and suspect) Wall Street carbon trading roles offered right after the 2008 financial collapse are non-existent with fee and dividend.
Third, the opposition successfully tagged cap & trade as a "tax," which was basically true. It was not revenue neutral like fee and dividend.
The wall of denial and opposition, including within the carbon intense sectors, has been breached.
Public opinion, including conservatives, strongly favors action.
The image of monolithic oil patch opposition is outdated. Media support and growing corporate support for a fee and dividend policy are encouraging signs that may provide “air cover” for Congressional Republicans contemplating a “jail break” from inaction.
Economic challenges are lessening as circumstances evolve. The coal sector continues its decline as natural gas and renewables displace it. The growing acceptance for wind and solar in the oil patch and central states represents a burgeoning energy constituency that bodes well for a fee and dividend, which will facilitate their expansion.
Still, many political economy barriers remain, including:
The incalculable sunk costs of the fossil fuel economy and the fact that it produces an invisible waste product, conveniently concealed in the atmosphere and oceans, that everybody generates;
Human's natural optimism bias, capacity for denial of the uncomfortable and ingrained lack of urgency about future dispersed threats that exacerbate familiar disasters; trends discernible only over long time scales, deliberate obfuscation of alarming data by orchestrated public relations campaigns, abetted by scientific reticence and general misunderstanding of real risks and costs;
We favor full dividend return. The broader political economy must weigh not only what is required for passage but for sustained support over decades. Thus political decisions about revenue application must consider more than economic efficiency. Equity (fairness) and effectiveness (enforcement and compliance costs per unit of GHG reduction) matter. Full dividend return cushions the impacts of the fee. Public acceptance, as with the Alaska Permanent Fund and Social Security, will reinforce political stability, which conceivably might assuage lenders' perceived financial risks and thus reduce borrowing costs.
We favor with full revenue return also because of its simplicity, transparency, accountability, implicit fairness, the salience (personal impact) of the direct “carbon dividend” check and because of its clear signals to industry: the creation of aggregate consumer demand for lower carbon products, which in the long run will be cheaper than carbon-intensive ones.
Passing a RNCF will require building a coalition in Congress despite fierce resistance from the powerful fossil fuel lobby. This will require compromise and political courage born of public pressure. CCL is helping to foster that long overdue, healthy debate using its unique skills and persistent approach.
Who will take these actions?
A New Strategy for an Old Concept: Catalyzing Public Mobilization for Effective Carbon Pricing
June 13, 2017
Citizens’ Climate Lobby occupies a unique niche. This lean, nonpartisan, single issue grassroots organization has grown explosively in a decade to over 86,000 supporters organized in chapters spanning every Congressional district and 37 countries. Members of Congress (MoCs) personally know their CCL constituents, who are well trained, on message, and always respectful.
CCL "exists to create the political will for climate solutions by enabling individual breakthroughs in the exercise of personal and political power.” Training citizen volunteers in the use of the levers of political will, in 2016, CCL held 1388 lobby meetings, sent 40,000 letters to Congress, published 2850 pieces on print media and conducted 2300 outreach events.
Their first lobby day 10 years ago was attended by 25. Its June, 2017 international conference drew 1,300, who met with over 500 Congressional offices. At it’s November, 2017 Congressional Education Day, 584 self-funded volunteers will present an analysis of MoC’s questions about RNCF from June. No other organization has these data, nor the depth of constituent relationships with Congress.
CCL has assembled a transpartisan advisory board of outstanding leaders in politics, energy policy, science, economics, entertainment and social action.
CCL trains volunteers to shape public opinion in dozens of focused action teams. Groups take on issues such as faith, youth, academia, business, labor, regional concerns, politics, outdoors, science, state level initiatives, environmental justice, communicating with progressives and conservatives, farming, etc. The Oil Team, for example, composed mainly of retired oil company employees, engineers and economists is collaborating with companies like ExxonMobil, BP and Shell.
Business Climate Leaders, a project of CCL, helps American business leaders advocate for market and consumer friendly carbon pricing legislation.
Weekly CCL University webinars offer instruction on issues like communication and language, understanding the economics of RNCF, moving legislation through Congress, refuting climate science myths, arranging community talks, taking effective minutes, obtaining community leader and municipal endorsements, working with the academic community, oil and gas companies’ support for carbon pricing, public opinion, health impacts, national security issues, carbon sequestration, meeting with editorial boards, writing effective letters and preparing for interviews.
The prize funds and recognition would support increased staffing for CCL's modest DC presence.
Where will these actions be taken?
Congressional legislation begins in the House Ways and Means and Senate Finance Committees. Grassroots and grasstops actions are taking place at every level: from the dinner table, dorm room and classroom to town hall meetings, social media, print media, TV and radio -- and in the voting booth, and:
In Congressional offices, where citizens are meeting face to face with their representatives and staffs to communicate their concerns, hold them accountable for addressing this unavoidable issue and convey its urgency. Their message: it's time to rectify the market failure that has allowed this situation to develop, despite decades of international negotiation and national half-measures;
In corporate boardrooms, where the unsustainability of our current carbon-based economy and looming carbon asset risk must be addressed;
In vulnerable areas everywhere climate impacts are imminent or already evident;
In editorial and media offices, non-profits and investment institutions;
Governments around the world are feeling the demand for effective action as citizens awaken to the real stakes. The Carbon Pricing Leadership Coalition, with its 30 government partners, 150 private sector partners, 58 organization partners, brings together leaders from across government, the private sector and civil society to share experience working with carbon pricing and to expand the evidence base for the most effective carbon pricing systems and policies.
Canada is exemplary in its establishment of a national carbon fee beginning in 2018 at $30C/t rising over 5 years to $50C/t of CO2.
Great Britain now has a $24/t carbon fee and is shutting down coal mines.
French President Macron is pursuing a $110/t fee (33Euro/t) by 2030.
China is in the process of implementing a hastily crafted, controversial cap and trade system, but there are indications that they are moving closer to a carbon tax. A U.S. BCA would push them in that direction. China also is deploying renewables at a rapid pace.
In addition, specify the country or countries where these actions will be taken.
What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?
Emission scenarios (p16) paint a bleak picture. We need to be on the falling green line, but we're on the rising red line: Atmospheric CO2 levels are smashing records despite deployment of more renewables and 25 years of UN negotiations.
Market forces must align to abandon $20T in reserves to afford at least a 50% chance of staying below 2C. Recent data indicate that even 2C will be disastrous, and we’re now more than halfway there. There's no more room in the “carbon budget,” yet demand continues to grow, and existing carbon prices around the world have been nowhere near sufficient to throttle it.
The Carbon Tax Center's model with CCL's parameters shows steep emission reductions:
Costly adaptation measures are urgently needed, thus carbon fee revenues will be eyed as natural funding sources. We recommend that revenues be used solely for direct dividends in order to protect revenue neutrality from endless competition for local projects. Substantial adaptation funding can be mobilized by prioritizing extant federal programs, public-private green funds, state and local green bond financing and innovative financing.
A patchwork of carbon prices have been enacted in about 40 countries, mostly through emissions trading systems. No carbon trading system has yet been definitively shown to have significantly reduced emissions. About 15 countries and jurisdictions tax some carbon emissions, the B.C. carbon tax showing definite benefits.
Trade pressure will provide stronger incentives for a global carbon price than the UNFCCC ever could under its present mandate.
The U.S. comprises approximately a quarter of the world’s $74 trillion economy. A U.S. BCA could harmonize an incoherent system as it incentivizes comparable pricing, with nations using revenues internally rather than subsidizing the low-carbon transition in the U.S.
2016 U.S. trade with the following countries was:
India: $60B. India has introduced a carbon tax and is gaining experience.
The U.S. and these 5 countries are responsible for over 50% of the world’s economy and all either have or are considering various pricing regimes.
2016 U.S. imports from China exceeded $460B and exports over $115B. China, aggressively trying to reduce its carbon intensity, will be inclined to protect this imbalance.
China is implementing several regional cap and trade programs with partial coverage, low prices and limited transparency. The establishment of a national system starting with limited coverage, targeted for 2017, may be delayed. There is debate over shifting to a carbon tax. A U.S. BCA would help China shift to a simpler, transparent carbon tax
What are other key benefits?
Enormous beneficial health impacts and cost savings derive from burning less dirty fuels. The recent Lancet study reports a huge increase in the number of people over 65 exposed to extreme heat, up by 125 million between 2000 and 2016. The economic value of health impacts is “an order of magnitude higher than the social cost of carbon for fossil fuel electricity” and must be considered in any energy policy.
Health benefits can more than offset the cost of carbon emissions reduction by up to 10-fold. Expressed as a price/ton of CO2 pollution, cutting fossil fuel emissions to limit warming to 2.5 ºC provides US health co-benefits valued at $200/ton CO2-e. An EPA study estimates that the co-benefits of reduced air pollution are at least as large as potential climate benefits, and one from the IMF estimates U.S. health co-benefits of $35/t.
Decreased fossil fuel use provides additional important health benefits from avoiding climate change and promoting healthy lifestyles.
The intergenerational injustice posed by runaway climate change can begin to be addressed by internalizing future climate change costs in today's fuel prices and by reassessing the discount rate used to value future impacts.
Income inequality, an increasing threat to domestic tranquility, would be reduced by a dividend providing some basic income guarantee to all recipients.
The strategic benefit of U.S. leadership on climate cannot be overstated. When the U.S. decides to resume its traditional cooperative leadership role in the world, our moral, diplomatic and economic position can be restored. Lower reliance on oil will reduce the risk of war for oil.
Less cooling water will be needed by generating stations by reducing fossil fuel consumption. That warmed water can be devastating to downstream habitats.
Hope and despair now compete in our rapidly deteriorating world. Billions of people are being or will be traumatized, directly or indirectly, by climate impacts. The psycho-social benefits of harnessing the enormous power of money to work with us rather than against us will contribute to our ability to tolerate the coming upheavals, bolster hope and support positive action, the best antidote to despair.
Young people are especially vulnerable and must be protected from despair. The unmistakable message that adults are aggressively and effectively addressing this threat will send critical, positive psychological messages that will motivate them to participate in the coming transformation.
Youth Plaintiffs Celebrating Court Victory
What are the proposal’s projected costs?
The study by a former US Treasury Office of Tax Analysis official on delivering the carbon dividend predicts that initial startup costs are substantial and dependent on the frequency of payouts. First year administrative costs would be about 7.5 percent -- $6 billion of the $80 billion of carbon fee revenue, but the percentage declines quickly in later years. Second year costs would be 4.6 percent ($6 billion / $130 billion of receipts) and in the fifth year, 2.1 percent ($6 billion / $280 billion); by the tenth year, costs would be only 1.1 percent ($6 billion / $530 billion) and continue to decrease thereafter.
Challenges: The major challenge is the enormous political power of the fossil fuel industry -- the most powerful in history -- its sunk costs, pervasiveness and the success of the denial industry it funded.
Another obvious obstacles is that States dependent on fossil fuel exports for national income -- Russia, Nigeria, Venezuela, Saudi Arabia, for example -- can be expected to vigorously resist measures aimed at demand destruction.
Investors in energy companies and some utilities may lose share value. Benefactors of emission price volatility will lose both money and influence. Cushioning the impacts on affected communities (p17) and workers must be addressed by sensitively designed policy that makes allies out of coal and oil field workers with more attractive prospects.
A more interesting cost question is the cost/benefit assessment of the transition to clean energy, which range from $0.5T-$1.3T/y:
IPCC: $870B/y, reducing economic growth by a trivial 0.06%.
The International Energy Agency: $1.3T/y to 2050.
CERES: $1T/y to 2030 (T/y to 2030.
By comparison: In FY 2015, Pentagon and related spending totaled $598 billion. The U.S.-lead war in Iraq has cost the US at least $1.7 trillion with an additional $490 billion in benefits owed to war veterans, expenses that could grow to more than $6 trillion over the next four decades counting interest.
The gradual elimination of worldwide fossil fuel subsidies would save up to $5T/y.
Thus these investments will pay for themselves in the long term. Savings in fuel costs, health care and defense provide even more immediate ROI.
Poster at COP21
Like the climate system itself, the global energy economy wields enormous inertia and feedbacks, both positive and negative; unknowns, such as innovation; and surprises, both pleasant and unpleasant.
And like the economy, in which small forcings like the Federal Reserve tweaking overnight interest rates by a tiny percent produce headlines, and sustained trends big shifts, the inexorable pressure of a carbon fee will, assuming classical economic theory is correct, drive production and consumption downward over time.
The looming question is: over how much time, when we know we are out of time?
Passage: The instant RNCF passes will mark an economic sea change. Markets will respond in proportion to the strength and kinetics of the price signal, propagating a change in calculus and behavior throughout the entire system. Our proposed fee will rise predictably to $105/t by year 10 -- a significant amount. Dividends will rise in proportion to the fee and consumption, then level off and fall as carbon intensity declines.
Implementation: The Treasury Department estimates a 2- year set up requirement.
Shifting the demand curve: modeling suggests that definitive emission reductions can begin to occur within 3 years of implementation (REMI fig1.)
Regular progress reports and education on emission reductions, innovation, and economic benefits will help sustain public engagement, support and provide business with active awareness of how best to plan future investments.
International harmonization could occur relatively quickly or take years, depending on the quality of leadership and market pressure brought to bear. The lofty but unrealistic aspirations of the Paris diplomats would be actualized by the transparent and ambitious framework created by robust global carbon pricing.
- As the price signal becomes more robust, demand for conventional energy will fall. The fee will be $165/t at year 15 and should continue to rise until decarbonization is achieved. It should not be eliminated while fossil fuels are being consumed on a large scale.
- Planetary energy balance can be restored only by harnessing the world's energy economy to an aggressive and workable plan targeted to science-based goals.
- The main obstacles are political.
- We know what we have to do and already have the capability to transition to low carbon processes for most of our needs within the next few decades.
The most advanced civilization in the known universe, the one that can unearth the Higg's Boson, manipulate its own DNA, decipher its home planet, land an SUV-sized rover on Mars and comprehend its place in the web of life surely possesses the skill to power itself in a way compatible with its long term survival. This transition has already begun and must accelerate by orders of magnitude -- it will only if we get the price right.
RNCF can be one of Warren Buffett's "non-extraordinary things" that "gets extraordinary results."
The Large Hadron Collider
About the author(s)
Peter G. Joseph, M.D.: Citizens' Climate Lobby, group leader, Marin County, CA chapter. Liaison to Sen. Boxer and Rep. Huffman (CA02). Trainee, The Climate Reality Project, 2007, former CRP district manager for N. Ca. Retired Emergency Physician and department chair, Eden Medical Center, Castro Valley, CA. 1982-2011. University of Michigan Medical Center, 1970-1977, internal medicine board certification. Columbia College, B.A., Biology, 1970. Co-author of prior CoLab carbon pricing proposals, winners of the 2014 and 2015 popular choice awards. Observer at COP21.
Noel Smyth: Citizens' Climate Lobby group leader, Delaware County, PA. Liaison to Congressman Pat Meehan (PA07). Executive Director, J. P. Morgan Chase. Board Member and Vice President, the Global Sourcing Council. Graduate Certificate in Innovation and Corporate Sustainability, Harvard University, 2017. MS Information Systems, Drexel University, 1998. BS Civil and Environmental Engineering, Pennsylvania State University, 1987.
Robert A. Archer: Marin Citizens' Climate Lobby; B.A., Economics, Yale University, 1964; University of Pittsburgh M.P.I.A, economic development; Peace Corps volunteer, Colombia, 1964-66; US Agency for International Development Senior Energy Advisor, 1990-2013, responsible for: electricity sector reform and privatization, energy regulatory development and energy efficiency in Eastern Europe and Eurasia. Supported policy reforms for private sector participation in power generation; responsible for Energy Efficiency Research Network for buildings in S.E. Asia in collaboration with Lawrence Berkeley National Laboratory. Supported development of DOE domestic energy regulatory programs for decentralized electricity generation, oil price controls and natural gas imports. Chair, Energy Regulatory Research Award, Energy Regulators Regional Association, Budapest, Hungary.
The Little Engine That Could: Revenue Neutral Carbon Fee and Dividend, 2015 contest entry.
The Little Engine That Could: Revenue Neutral Carbon Fee and Dividend, 2014 contest entry.
A Carbon Tax in Pro-Growth Fiscal Reform, 2015 contest
Put A Price On It -- Our Climate, 2017 entry
Personal communication, Hoover Institute, Stanford, CA
Hansen: Young People’s Burden: Requirement of Negative CO2 Emissions (Abstract)
Hansen: Young People’s Burden: Requirement of Negative CO2 Emissions (Full script)
Tax Policy Center, Brookings: Taxing Carbon: What, Why, and How
Bloomberg: Europe Needs a Higher Price on Carbon