A revenue neutral, steadily rising fee on GHG emissions will steer the economy to a clean energy future and establish US climate leadership.
“It’s not a tax if the government doesn’t keep the money.” George Shultz, former US State and Treasury Secretary (1)
The rising use of fossil fuels threatens our survival. As long as markets fail to internalize the true costs of these energy sources, their use is inevitable. Economists agree that this failure can be corrected only with a carbon price.
A properly designed U.S. carbon price will facilitate global policy alignment, efficiently internalize the real costs of carbon-based fuels (2), rapidly achieve large emission reductions, and stimulate the economy.
The most effective way to price carbon is with an escalating revenue-neutral carbon fee and dividend (CFD) with border adjustments. Strengths include:
1. Full recycling of revenues: Recycling of the funds via direct monthly payments to citizens will inject $1T into the economy over 10 years, increase real disposable income and GDP, protect lower income households, free consumers to make independent energy choices, build aggregate demand for low-carbon products, spur innovation and can achieve widespread, sustained public support.
2. Transparency: Revenue Neutral Carbon Fee & Dividend (CFD) can be designed to be understandable, accountable, accessible to public scrutiny and clear in its signals and benefits, in contrast to cap and trade and regulatory policies.
3. Border tax adjustments (BTAs): imposed on basic energy-intensive materials from nations without a carbon fee, with rebates to US industries exporting to those countries, will drive down import substitution for domestic products, create a fair competitive environment for exporters and motivate other countries to adopt comparable carbon-pricing policies.
4. Efficiency: No increase in government revenues or new bureaucracies are necessary to implement a CFD.
5. Predictability: A structured, rising price on GHG emissions suppresses market volatility and creates clear price signals for mid to long-term investment planning in a carbon-constrained world.
What actions do you propose?
How will CFD work?
The carbon content of fossil fuels is assessed as it enters the economy, upstream at the point of extraction (mine, well head or port of entry). We propose a low starting fee on the embedded GHG content of $15/ton, steeply escalating by $10/t/y, sending a strong price signal to markets.
All revenues, less administrative costs, are fully rebated to U.S. households on a per capita basis in the form of monthly dividends. Revenues are administered by the Treasury Department. Existing federal agencies (Treasury, Social Security, IRS) already have the capacity to efficiently disburse electronic transfers or “carbon dividend” checks to 250 million Americans.
Congress will determine who is eligible for the dividend, distribution methods and how to prevent fraud. We suggest that a household be counted as a maximum of two adults, with half-shares for up to two minor children.
Border fees, consistent with WTO regulations, will be imposed 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 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.
Critical R&D funding, spurred by a carbon price, can flow through other parts of the federal budget to protect revenue neutrality, likely the key to passage.
The fee can rise steeply without hurting the economy
Urgency demands strong price signals, but price shocks must be avoided. We believe this is best accomplished by full revenue return.
Literature indicating negative effects of carbon pricing assumes the government keeps the money. There is little academic research on the macroeconomic impacts of a steadily increasing monthly dividend equal to 100% of an upstream carbon fee. Although a combination of dividends and swaps may show long term benefit, other modeling suggests that the full dividend better cushions against the economic impacts of the rising fee.
Studies also indicate that revenues will exceed $1-1.2T in 10 years (CBO) and at least $2.7T in 20 years without driving the economy into recession. Recent Congressional proposals ( Whitehouse-Schatz) have been conservative in their rate of fee increase out of concern for negative impacts. None has recommended full dividend return.
Congress will determine the tax status of the household dividend. If the government doesn’t keep the money and Congress determines the dividend to be taxable, then the 25% CBO offset would not apply. If the policy remains revenue neutral, the stimulus value of an untaxed monthly dividend would overcome the presumed tax revenue shortfall. Either way, GDP will rise.
Tax swaps vs full dividend return
Revenue recycling via a “tax swap” -- a reduction in taxes in exchange for the fee -- is an appealing way to refund the revenues, considered by some as more economically efficient than dividends. (2.1, 2.2, 2.3.,2.4, 2.5, 2.6) We understand that the politics may require tax swaps.
CCL favors full dividend return. Policy must look beyond economic efficiency to consider equity and effectiveness, and must weigh both what is required for passage and for sustained support over decades. We believe that full dividend accomplishes all this with greater certainty.
The standard "It’s not a tax if the government doesn't keep the money" applies only to the 100% dividend. In order to facilitate tax rate reductions offsetting a revenue-neutral carbon tax, Congress must first appropriate the funds for existing budget obligations. The tax swap comes later to households and businesses as a reduction in, or rebate on next year’s taxes. A carbon fee that depends on tax swaps is still a tax.
However, if revenues are returned as monthly dividends equal to 100% of all available revenues, the money is not appropriated. Instead of a tax which puts funds into government spending, a fee is paid directly to American households every month. Congress will not have an opportunity to appropriate revenues that go into an entirely self-contained fund. As the CEO of ExxonMobil quipped, “this may be hard for some politicians to say.”
Further, if funds are appropriated, Congress is empowered to alter the policy in the future. Experience shows that if governments are free to intervene in the price level and to curb the rate of increase, they will experience unrelenting pressure from special interests who seek to freeze the price at a convenient level, though a higher price would do more to improve efficiencies in the wider economy.
Another concern about tax cuts is that as fossil fuel use declines, 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? Such shortfalls may be offset by increased economic activity, as well as by reduced healthcare and military expenditures. This issue must be addressed early in the debate.
Recent history also indicates corporate profits are rising much faster than investment. Profit has been used to compensate shareholders and management, build cash positions or has been offshored rather than invested in productive economic activity. Since US corporations generally pay much less in actual taxes than the 35% rate, a supply-side tax swap may induce repatriation of some of those funds, but would be no more a guarantee that the funds will be invested in decarbonization than is the household dividend. It's the steeply rising price that drives the necessary transition -- by both business and consumers.
On the other hand, a 100% monthly dividend provides the macroeconomic efficiency required to achieve ongoing economic growth during rapid emissions reductions, while also providing more certainty to businesses and investors about the energy pricing landscape over the medium to long term.
Concurrent with the modeling of full CFD, REMI (p.45) simulated an across the board (ATB) tax cut for the most common direct taxes: income, payroll and corporate. Their findings on the effects of an ATB are entirely consistent with academic and CBO results: marginally higher employment and GDP in the long-term (beyond 2020) and slightly lower real disposable personal income (RDPI).
There is a progressive feature to the CFD. The dividend compensates for a regressive energy tax that returns no value to low-income households. While upper income people will not be fully compensated for their higher costs, they also have much higher carbon footprints because they can afford to, suggesting that the dividend will serve as their price signal to reduce their carbon consumption if they wish.
CCL stands for full revenue return because of its simplicity, transparency, accountability and effectiveness, its implicit fairness (equity), the saliency value of the direct “carbon dividend” check and because its consumer spending effects build aggregate demand for low carbon products. We wonder whether public acceptance, as with the Alaska Permanent Fund, could reinforce political stability, which might lower lenders' perceived financial risk and thus borrowing costs.
What if other countries don’t comply?
Foreign emitters will discover their products being impacted by the U.S. border fee. Those nations will feel increasing pressure to reduce their carbon intensity or risk paying fees to American taxpayers that they could be collecting for themselves.
A border adjustment has real teeth. Treaties without enforcement (e.g., Kyoto) are idealistic but not realistic. International opposition to a US BTA is unlikely since governments (China, EU and the US, when we join them) accounting for 50% of global emissions will already have or be preparing for carbon pricing. Over time, countries will not be able to forego the largest market -- the U.S. In any case, U.S. industry will be held harmless by rebates.
Call to Action: Messages that can mobilize Congress
1. It’s conservative: “A tax that takes the existing costs of emissions and imposes them on the creators of the emissions rather than on innocent bystanders seems a modest step forward, certainly on behalf of a more equitable and growth-oriented tax structure.” -- Irwin Stelzer, The Weekly Standard, 7/2/15.
Conservatives concerned about U.S. competitiveness and moral leadership can advocate for the underlying values of CFD: tax what you want less of (pollution), not what you want more of (work and investment); phase out subsidies and attribute all costs to all energy sources, and liberate markets to choose winners and losers (3,4,5,6,7,8,9,10).
Vested interests have supported those who purportedly fear bureaucratic solutions (11,12,13). CFD neutralizes these concerns by correcting a market distortion with a small government, efficient, market based, least bureaucratic solution. Internalizing costs becomes an opportunity appealing even to science "skeptics."
2. It’s also progressive: Public support for an understandable revenue neutral CFD is strong. CFD also begins to address the disproportionate burden of the fossil fuel economy borne by minority communities (14,15). Social justice activists can embrace CFD as a practical and fair (16) means of rendering climate justice -- and tell Congress.
3. CFD closes the gap between personal values, morality and policy. Climate denial is increasingly difficult to maintain, particularly in the face of the moral arguments recently made by the Pope. As a measure that's good for the economy and public health, CFD can serve some politicians as a bridge between denial and bipartisan acceptance.
4. It’s efficient: The rising fee will require no new bureaucracy or regulations and may enable reduced reliance on complex regulations. Applying the fee on a discrete number of production and import sites affords low administrative costs.
5. It’s effective: CFD is more effective than trading schemes and a robust measure would establish ambitious US leadership internationally. Permit trading and regulatory schemes have been either opaque, regressive, inefficient, have fostered permit price volatility, have not guaranteed a rising price on carbon, lack border adjustments, are potentially subject to fraud (17) and are unlikely to work in nations with low institutional capacity and a history of endemic corruption. In such nations, a structured carbon fee could be administered by strong finance ministries overseen by the IMF and World Bank. (Archer)
Congressional seriousness about a US CFD with border adjustments could spur other nations to more ambitious action beyond their current INDCs at COP21.
6. A rising carbon fee will have a market stabilizing effect: Financial market indices reflect the current valuation of fossil fuel companies, 40-60% of which anticipates future cash flow from reserves still in the ground (18). Seventy percent of these, scientists agree, must be abandoned to avoid dangerous tipping points (19). Market risk also increases as $2B per day is spent on exploration for unburnable sources (20). Some shareholders are already advocating for large fossil fuel companies to begin an orderly transition into clean energy companies (21,22). Institutional investors concerned about systemic risk (23, 24) will welcome a steadily rising carbon price signal. CFD creates a predictable framework for such planning.
7. A robust carbon fee addresses national security: Military leaders are increasingly concerned about climate disruption as a national security issue (25, 25.1). The Pentagon's latest Quadrennial Defense Review cites climate change as a threat multiplier (26). Any measure capable of stimulating rapid emission reductions and international cooperation enhances its appeal to those responsible for world security.
Who will take these actions?
- CCL has in the past 5 years held 3,300 meetings with elected representatives, published 6,000 pieces in print media, and delivered 10,000 personal letters to Congress on behalf of CFD.
- CCL has grown rapidly, now with 17,000 supporters in 430 Congressional districts organized in almost 300 chapters engaged in building respectful relationships with media, Congress and their staffs. The June, 2015 international meeting drew over 900 volunteers to Washington, DC, who met with over 500 Congressional offices.
- CCL is unique in its accumulated information about specific Congressional views on carbon pricing.
- Risky Business (Paulson, Steyer, Bloomberg, Shultz, et al)
- Carbon Tax Center
- The Guardian
- Carbon Pricing Leadership Coalition
- Future 500
- Republican businessman Jay Faison and his new website
- Legislators in districts where climate change is already affecting local economies may provide the necessary leadership.
- Senators Whitehouse and Schatz's new bill has engaged conservatives.
Think tanks and policy centers:
- Some corporations have already factored a shadow carbon price into their operations (21,22).
- 6 EU oil majors have called for a predictable carbon price and a “clear roadmap for future investment, a level playing field for all energy sources across geographies.”
- The CEO of ExxonMobil explicitly supports a revenue neutral fee. (See Refs)
- Ceres is building corporate responsibility efforts and can promote a CFD.
- Universities, students and others considering divestment should embrace CFD as asound investment vehicle to their moral objective.
- The Pope has questioned the morality of trading of carbon-emission credits. The Dalai Lama, Evangelicals, and Rabbis, are all calling for strong, effective action.
- Citizens engaged in the COP21 conference are pushing to include carbon fee language in the final agreement.
What challenges will be faced in implementing this proposal and how will they be overcome?
Fear of "big government" and of loss of liberty drives conservatives; fear of markets drives progressives. A low-cost, small government, market and consumer-friendly solution can win.
How much will emissions be reduced or sequestered vs. business as usual levels?
A powerful catalyst is required to shift the world's energy economy toward low-carbon sources. Market forces must rapidly align to abandon $20T in reserves to afford at least a 50% chance of staying below 2C . Even 2C is considered intolerable by some climatologists.
Emission scenarios (p16) paint a bleak picture. We need to be on the falling Green Line, but IEA data show we're on the rising Red Line: world GHG emissions hit a record high in 2014 of over 40Gt. Alarmingly, announced INDCs for COP 21 are inadequate. The market must be harnessed to the rescue with a steep, enduring signal.
REMI modeling with full dividend and steep ramp up shows US emissions falling 50% by 2035 without harming the economy. Brooking's mainly tax swap plan projects only 12% after twenty years and 30% by 2050. We know of no comparative emission models of mixed dividends and tax swaps.
Ref: See Comments
What are other key benefits?
CFD is politically viable: understandable by the public, nonpartisan, equitable and economically efficient. The "carbon dividend" check is a democratic and tangible reward for participation in a effective solution.
The strategic benefit of U.S. leadership on climate cannot be overstated. Lower reliance on oil will reduce the risk of war. When the U.S. leads, our moral, diplomatic and economic position in the world will be greatly enhanced.
CFD guarantees a rising price of carbon over time, unlike cap-and-trade in the European Union.
Income inequality, an increasing threat to domestic tranquility, is addressed by full dividend return.
What are the proposal’s costs?
Using the Economic Stimulus Act of 2008 as a proxy (25.2), CCL estimates that intermediate-case administrative costs of dividend distribution will be, in the worst possible case, 3.4% of receipts in the first year, with a declining cost below 1% thereafter (26.1).
Investors in energy companies and some utilities may lose share value. Benefactors of emission price volatility will lose both money and influence. The costs to communities and workers of the clean energy transition will have to be addressed by Congress.
Cost/benefit assessment of the transition to clean energy:
Climate-related events are already estimated to cost $1.2T per year or 1.6% of global GDP and rising. IMF estimates post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion in 2015.
Estimates of the investment required for a clean energy transition range from $0.5T-$1.3T/y:
- The International Renewable Energy Agency: $550B/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.
Thus, investment in clean energy will pay for itself in the long term, so it's not a cost. Savings in fuel, health care and defense provide more immediate return on this investment.
Any cost/benefit analysis of transition to a low carbon economy must also consider the extremely high costs of failure.
- Passage: The instant CFD passes will mark an economic sea change. Markets will respond promptly to a predictable price signal, propagating a change in calculus and behavior throughout the entire global financial system.
- Implementation: The proposed fee will predictably rise to $105/t at 10 years. Dividends will rise in proportion to the fee, then level off and fall as carbon-intensity declines.
- Shifting the demand curve: Economic modeling suggests that measurable emission reductions can begin to occur within 3 years (REMI fig1.)
- Regular progress reports and education on rates of emission reductions, innovation, and economic benefits will help sustain public support and provide business with active awareness of how best to plan future investments.
Medium term: The fee will be $155/t at year 15 and should continue to rise until decarbonization is achieved. It should not be eliminated while climate change remains a threat.
As the price signal becomes more robust, demand for conventional energy will fall (26,27,28). Fortunately, we already have the technology to switch to carbon-free energy by 2030-2050 given strong incentives (29,30).
Long term: 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, and those can be overcome by a combination of the right policy and focused political pressure.
Fortunately, the civilization that can sequence its own DNA, understand its home planet (31,32), land an SUV-size roving lab on Mars, understand the fabric of the universe (33,34) and comprehend its place in the web of life (35) also possesses the knowledge, skill and will -- perhaps -- to power itself with current and future technologies compatible with its long term survival.
This transition has already begun. It must accelerate. CFD can be The Little Engine That Does It.
A Carbon Tax in Pro-Growth Fiscal Reform: A comparable proposal with lower ramp-up, does not return 100% revenues to households.
(1) George Shultz, personal communication, 26 November, 2013 at Hoover Institution, Stanford, CA
Regional Economic Models, Inc., The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax,
Bob Inglis: Changing the Dialogue on Energy and Climate, TED
Center for Climate and Energy Solutions, Options and Considerations for a Federal Carbon Tax
Paul Krugman, Building a Green Economy
Michael Wara, John Weyant, The Case for a Carbon Tax as US Climate Policy, Stanford University webcast, January 6, 2014.
Carbon Tax Center, Design of Economic Instruments for Reducing U.S. Carbon Emissions, addressed to the U.S. Senate Finance Committee, January 2014, submitted on behalf of Citizens' Climate Lobby
Risky Business, The Economic Risks of Climate Change in the United States
Skeptical Science, The Economic Impacts of Carbon Pricing
Congressional Budget Office, May, 2013, Effects of a Carbon Tax on the Economy and The Environment,
Hassett, Mathur and Morris, A Carbon Pollution Tax in the Context of Broader Tax Reform: Design and Distributional Issues, American Enterprise Institute, November, 2012.
Dinan, Terry, Offsetting a Carbon Tax’s Costs in Low Income Households, CBO, Working Paper 2012-16, November, 2012.
Joshua Meltzer, A carbon Tax as Driver of Green Technology Innovation, Brookings, May, 2014
Urgency to Act:
James Hansen, Too Little, Too Late?
International Energy Agency, Energy Technology Perspectives 2014
U.S. Global Change Research Program, U.S. National Climate Assessment, 2014
Chertoff, Michael, Panetta, Leon, National Security and the Accelerating Risks of Climate Change, CNA Military Advisory Board May 2014
U.S. EPA, Climate Change in the United States: Benefits of Global Action, June, 2015
U.S. National Academy: Abrupt Impacts of Climate Change: Anticipating Surprises
How could a national price on carbon be implemented in the United States?