Carbon Fee and Dividend Carbon Fee and Dividend is the policy proposal created by Citizens’ Climate Lobby (CCL) to account for the costs of burning fossil fuels. It’s the policy that climate scientists and economists alike say is the best first-step to reduce the likelihood of catastrophic climate change from global warming.

Our carbon fee and dividend proposal works like this:

1. A fee is placed on fossil fuels at the source (well, mine, port of entry). This fee starts at $15 per ton of CO2 equivalent emissions, and increases steadily each year by $10.

2. All of the money collected is returned to American households on an equal basis. Under this plan about 2/3 of all households would break even or receive more in their dividend checks than they would pay in higher prices due to the fee, thereby protecting the poor and middle class [1].

3. A border tariff adjustment is placed on goods imported from, or exported to, countries without an equivalent price on carbon. This adjustment would both discourage businesses from relocating to where they can emit more CO2 and encourage other nations to adopt an equivalent price on carbon.

A predictably increasing carbon price will send a clear market signal which will unleash entrepreneurs and investors in the new clean-energy economy.

References

1. “Dividends”. Last modified: February 12, 2015. The Carbon Tax Center.

The Scientific Consensus on Climate Change

97 percent of climate scientists are convinced, based upon the evidence, that human-caused global warming is happening. [1]

References

1. Scientific Consensus on Climate Change as a Gateway Belief. Yale Project on Climate Change Communication.

Why Put a Fee on or Price Carbon? Carbon pollution from the burning of fossil fuels carry significant “external” costs to society, such as the cost of more extreme storms, droughts, floods, and wildfires, as well as much higher healthcare and military expenses. These costs are expected to rise dramatically [1, 2].

Economists from both sides of the political spectrum, including Mitt Romney’s economic advisor Greg Mankiw [3, 4], adamantly believe that these costs should be borne by the companies responsible for the pollution, and that it will improve both the economy and the environment.

These fees, referred to as “Pigouvian” taxes, incentivize these companies and consumers to both reduce the pollution and its costs, and to create the clean, low-carbon jobs and industries of our future. An example of effective Pigouvian taxation is cigarette smoking. 50% of Americans used to smoke, now less than 20% do [5].

References

1. IPCC, 2011: Summary for Policymakers. In: Intergovernmental Panel on Climate Change Special Report on Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation [Field, C. B., Barros, V., Stocker, T.F., Qin, D., Dokken, D., Ebi, K.L., Mastrandrea, M. D., Mach, K. J., Plattner, G.-K., Allen, S., Tignor, M. and P. M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA 2. Jergler, Don. “NOAA: 2012’s U.S. Billion-Dollar Extreme Weather Events ‘Impressive’.” Published: Jan 4, 2013. Insurance Journal. Last accessed: 4-29-13. 3. Mankiw, Greg. “The Pigou Club Manifesto”. Posted: Oct. 20, 2006. Greg Mankiw’s Blog. Accessed: 4-29-13. 4. Mankiw, N. Gregory. “One answer to Global Warming”. Sept. 16, 2007. The New York Times. Last accessed: 4-29-13. 5. Lydia Saad. “One in Five U.S. Adults Smoke, Tied for All-Time Low”. Aug 22, 2012. Gallup. Last accessed: 5-22-13. 6. Mankiw, Greg. “Rogoff joins the Pigou Club”. Posted: Sept 16, 2006. Greg Mankiw’s Blog. Accessed: 5-15-13.

REMI Study Results

The REMI Study examined the effect of a progressive carbon fee and dividend, starting at $10 per ton of CO2 on the national economy as well as the economies of 9 regions of the US. The study then compared these results to the baseline case where there is no price on carbon.

Study Highlights:

• CO2 emissions decline 33% after only 10 years, and 52% after 20 years relative to the baseline, $0/ton of CO2 case.

• National employment increases 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 a carbon fee!

• 13,000 lives are saved annually after 10 years, with a cumulative 227,000 American lives saved over 20 years.

• $70-$85 billion increase in Gross Domestic Product (GDP) from 2020 on, with a cumulative increase in national GDP due to F&D of $1.375 trillion.

• Maximum cost-of-living increase by 2035 is 1.7-2.5%, depending on region. That’s 1 year’s normal inflation spread over 20 years!

The take-home from this study is that Carbon Fee & Dividend grows the economy in terms of jobs and GDP, while at the same time also reducing the country’s emissions and improving citizens’ health.

REMI Study

Carbon Dividend Delivery Study To address the question of “How will you go about distributing the carbon dividend to households?”, CCL commissioned an expert study of how to optimize the carbon dividend distribution [1]. Our goal was to maximize simplicity and minimize costs for government, businesses, and households while still getting a dividend to as many households as possible.

How would the dividend be distributed?

All the money collected from fossil fuel companies goes to a Carbon Fee Trust Fund managed by an Administrator (Treasury Department or private contractor). After administrative costs, the net funds constitute the pool for carbon dividends.

There are many decisions that must be made on the details of implementation. CCL’s recommendations for these decisions are detailed in our FAQ, which we’d be happy to make available to you. However, in the end, CCL will always support decisions that maximize the number of households receiving the dividend, maximize simplicity, and minimize costs.

The expert study confirmed CCL’s view that remitting the carbon dividend directly to households is the simplest and most robust way to distribute it.

How would the recipients be determined?

Recipients are identified from existing tax records [2] or through a special form for those who haven’t filed income taxes. Most people will get their dividend as direct deposit or on an existing government- issued debit card, with paper checks as a backup. Eligibility changes are taken care of on a monthly basis, and any underpayments or overpayments for the year are reconciled on the recipient’s next income tax return.

CCL is satisfied that these steps will make the carbon dividend distribution fair, flexible, universal, and highly visible to households. References

1. Lerman, A.H. “Paying Dividends to United States Residents with the Revenue from the Carbon Fee.” White paper commissioned by Citizens’ Climate Lobby. Dec 2015. Mr. Lerman was an economist in of the Office of Tax Analysis at the Treasury Department who analyzed, developed, and recommended tax policies. He has provided expert advice to policymakers, working on every major tax reform legislation and administrative reform since 1971. 2. Receipt of dividend is aligned with tax filing status, e.g., a married couple filing income taxes jointly will get both of their dividends in a single payment. Parents with dependent children will get their child dividends (up to two per family) included in a combined payment. The Environmental Protection Agency

How does the Carbon Fee and Dividend compare with the Clean Power Plan?

The most fundamental difference between Carbon Fee and Dividend (CF&D) and the Clean Power Plan (CPP) is that Carbon Fee and Dividend would be implemented by Congress, whereas the Clean Power Plan is being implemented by Executive direction under legal precedent set by Massachusetts v. EPA in 2007. Thus, when passed Carbon Fee and Dividend would be less prone to change by either the courts or a new president.

Second, Carbon Fee and Dividend is both more mindful of the economy and more ambitious in terms of emissions reductions. It would address economy-wide emissions, whereas the Clean Power Plan is limited to only a portion of the economy: the power sector, accounting for about 40% of emissions. By the EPA’s own accounting, each state could achieve the Clean Power Plan 2030 emissions reductions targets with a carbon tax of between $0-$39. By contrast, Carbon Fee and Dividend reaches a uniform nationwide $115 per ton by 2030 if implemented in 2020, meaning every single state would be in compliance with the Clean Power Plan without having to lift a finger.

Finally, and perhaps most importantly, Carbon Fee and Dividend includes a border adjustment that removes the incentive for businesses to relocate to countries where they can pollute more. Such a border adjustment is not possible with the Clean Power Plan.

World Trade Organization and the Border Adjustment

In order for a fee on carbon to work domestically and on an international scale, an effective border tax adjustment will be necessary. There is a concern expressed by many legislators that such a border adjustment would violate World Trade Organization (WTO) law, and specifically the General Agreement on Tariffs and Trade (GATT). However, this concern is unfounded [1, 2].

First, a border adjustment has been codified in US law (26 CFR 52.4682-3) since the Montreal Protocol went into effect on Jan 1, 1990. This border adjustment covers ozone-depleting substances, which also happen to be greenhouse gases [3]. Second, there are in fact two provisions in the GATT that make it clear Carbon Fee and Dividend would be WTO-legal:

• The border adjustment, as proposed by Citizens’ Climate Lobby, doesn’t discriminate against goods from other countries relative to goods produced domestically, nor against one country relative to another. Second, • Even if the border adjustment were discriminatory, article twenty, paragraphs b and g (i.e. “Article XX, paragraphs (b) and (g)” in legalese) allows for discriminatory border adjustments for environmental purposes.

So, Carbon Fee and Dividend is double-covered! Getting the border adjustment right is important because it ensures domestic manufactures have no incentive to move operations to a country that doesn’t have an equivalent price on carbon, and that if other countries want to keep using dirty manufacturing processes, they’ll have to pay the American people for the privilege.

References

1. Pauwelyn, Joost. “Carbon Leakage Measures and Border Tax Adjustments Under WTO Law”. March 21, 2012. Excepted chapter from “Research Handbook On The WTO Agriculture Agreement”. 2. Jennifer Hillman. Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? July 25, 2013. The German Marshall Fund of the United States. 3. 26 C.F.R § 52.4682–3 “IMPORTED TAXABLE PRODUCTS.”

Carbon prices around the world

We are often asked what China is doing to reduce emissions. It is often assumed that the answer is nothing. However, information gathered from three World Bank reports [1, 2, 3] indicate that governments around the world are taking action, China included:

In 2014, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes. Together, these jurisdictions account for more than 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation for pricing carbon. Together, these represent almost half of global Greenhouse Gas (GHG) emissions [4].

International Carbon Pricing*

• 14 countries and one sub-national jurisdiction (BC, Canada) are implementing or have passed legislation for a direct carbon tax. • 18 countries are taking steps to be in a state of “carbon pricing readiness” by 2016-2020. • 35 countries (incl. 28 in the EU) and 20 subnational jurisdictions have adopted emissions trading (ETS) programs.

Looking at it slightly differently, only two out of the ten of the largest economies in the world do NOT have a carbon price: the United States and Russia** [5].

*Note: Because there is overlap in the categories (e.g. some countries have both a tax and an ETS), the numbers in the breakdown add up to more than the total of 40 national and 20 sub-national jurisdictions mentioned earlier. **Note: this includes California, which has an ETS, accurately as the world’s 10th largest economy instead of India [6].

This laser talk and the data tables it draws from can be downloaded here.

Skeptic Claims and One-Liners

Carbon Fee Skeptic Claim: The US should not act until other countries put a carbon price into place One-Liner: Countries responsible for nearly 50% of global carbon emissions already have a carbon price mechanism planned or in place.

References

1. “Putting a Price on Carbon with a Tax”. The World Bank. June 3, 2014. URL for PDF download: 2. World Bank Background Note “Carbon Pricing Readiness: Looking Ahead”. The World Bank. June 3, 2014 3. “Putting a Price on Carbon with an ETS”. The World Bank. June 3, 2014. 4. “Statement: Putting a Price on Carbon”. The World Bank. June 3, 2014. URL: 5. “GDP (current US$)“. World Development Indicators. World Bank. Retrieved 1 July 2014. 6. “Widespread But Slower Growth in 2013“. Bureau of Economic Analysis, U.S. Department of Labor. June 11, 2014. Retrieved June 11, 2014. Jobs gained with Carbon Fee and Dividend According to a study from Regional Economic Models, Inc. (REMI), as a result of Carbon Fee and Dividend 2.1 million jobs would be added above the baseline after 10 years and 2.8 million after 20 years.

The industries that see the most growth in jobs are health care and social assistance as well as the retail trade. This is because they are labor-intensive industries strongly affected by consumer spending. The dividend boosts consumer spending. The greatest losses occur in the mining (specifically coal) and utilities industries.

Looking at 20 major industries, the REMI study shows that only 4 sectors suffered job losses – mostly mining – and that those combined losses were dwarfed by gains in in each of the top 7 industries alone!

Household Energy Costs Question: How will the carbon fee and dividend affect household energy costs?

For most families, energy costs are in the form of gasoline, natural gas or heating oil, and electricity. The cost will go up depending on how much fossil carbon is in the fuel or how much was burned in its production.

We calculated the costs from EPA emissions tables [1], a Department of Energy natural gas study [2], and a carbon emissions database assembled by Argonne National Laboratory [3].

For a first-year carbon fee of $15 per metric ton of CO2:

• Gasoline will go up by 16¢ per gallon (an 8% increase) • Natural gas by 9¢ per therm (a 7.4% increase) • Heating oil by 19¢ per gallon (an 8.7% increase) • Electricity by 0.6¢ to 1.1¢ per kilowatt-hour, depending on whether it’s generated by coal or natural gas (an increase of 4%-11.3%) [4].

As reported in our Household Impacts study, which used actual household spending from 2008-2012 to model its results, even with these cost increases, 53% of households and 58% of individuals are made whole nation-wide.

References

1. “Emissions Factors for Greenhouse Gas Inventories.” U.S. Environmental Protection Agency. 4 April 2014. 2. Bradbury, J., Z. Clement, and A. Down. “Greenhouse Gas Emissions and Fuel Use Within the Natural Gas Supply Chain: Sankey Diagram Methodology.” Jul 2015. 3. Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET). 4. Gasoline is regular 87 octane with 10% corn ethanol. For natural gas, 1 therm = 100,000 Btu. For electricity, 1 kWh = 1 kilowatt-hour. Power plant efficiency = 34.3% for coal, 61.5% for natural gas (NGCC). 5. Energy prices are national average retail or residential: gasoline in January 2016, natural gas in October 2015, and electricity in November 2015. Note that prices will vary considerably from time to time and place to place.

Carbon Fee and Dividend’s impact on low-income households How will your policy affect low-income households? Multiple studies show that returning all the revenue from a carbon tax or fee as carbon dividends leaves a majority of households with more money in their pockets [1, 2, 3]. Furthermore, low-income households benefit the most, with nearly 90% in the poorest fifth of the population coming out ahead [3], and the average household in that quintile coming out more than $1,000 ahead when the carbon fee is $30 per metric ton [1]. Even more strikingly, a recent analysis commissioned by CCL [3] revealed that when the net dollar benefit of the dividend is expressed as percent of household income, the benefit to the average low- income family – almost 1.8% of their annual income – far outweighs the small deficit – only 0.18% – paid by the average high-income household. Why is this? Although low-income Americans spend a higher fraction of their income on energy, the dollar amounts wealthy households spend on carbon-intensive goods and services more than make up for it. In fact, the wealthiest 20% of Americans account for about 32% of emissions, while the poorest 20% account for only 9% of emissions [4]. Moreover, our Regional Economic Models, Inc (REMI) study found that CFD would also increase jobs, and the strongest job creation would help the poorest three quintiles [5]. Our policy leaves low-income households better off financially, more likely to have a job, and it does this without any costly and complicated means-testing, income group targeting, or income-based subsidization.

References

1. Williams, R. C. et al. The Initial Incidence of a Carbon Tax across Income Groups. Resources for the Future. August 2014. PDF available at: http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-14- 24.pdf 2. Dividends spreadsheet model. Carbon Tax Center. Last modified: Oct. 1, 2015. Available at: http://www.carbontax.org/dividends/ 3. Household Impacts Study. Kevin Ummel. 4. “Ensuring Equity”. Carbon Tax Center. Last modified: June 14, 2014. URL: http://www.carbontax.org/protecting-the-vulnerable/ensuring-equity/ 5. Nystrom, S. and Luckow, P. “The The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax”. Regional Economic Models, Inc. and Synapse, Inc. for Citizens’ Climate Lobby. June, 2014. Fig 3.22, p. 36. Available at: http://citizensclimatelobby.org/remi-report/

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