Carbon Fee and Dividend

What is Carbon Fee and Dividend

Carbon Fee and Dividend is the policy proposal created by Citizens’ Climate Lobby (CCL) to internalize the costs of burning carbon-based 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.

Citizens’ Climate Lobby volunteers pride themselves in being FOR something rather than AGAINST things. So Carbon Fee and Dividend is the policy our citizen volunteers around the world are advocating FOR.

Read the policy and answers to
frequently asked questions below

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Why Carbon Fee and Dividend?

As long as fossil fuels remain artificially cheap and profitable, their use will rise. Correcting this market failure requires their price to account for their true social costs.

To gain multipartisan support we advocate for a true cost-comparison between competing fuels AND reducing greenhouse gas emissions.

What Will It Do?

A national carbon price, with full revenue return and border adjustments, will do four things: internalize the social cost of carbon-based fuels, rapidly achieve large emission reductions, stimulate the economy & recruit global participation.

The Basics of Carbon Fee and Dividend

1

Place a steadily rising fee on the CO2 content of fossil fuels.

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2

Give all of the revenue from the carbon fee back to households.

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3

Border adjustments will discourage businesses from relocating.

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4

It's good for the economy AND even better for the climate.

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Want to know more about Citizens’ Climate Lobby?

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Carbon Fee and Dividend In-Depth

Below you’ll find Carbon Fee and Dividend described in detail and answers to frequently asked questions or FAQs. Additionally, how Carbon Fee and Dividend impacts the climate and economy in the USA is detailed in the REMI report.   Here is a  one pager summary of the the REMI report.

The Policy

Download Carbon Fee and Dividend, a full-text version of CCL’s Carbon Fee and Dividend proposal (2 pages) available in English and French. Please also see our one page cartoon describing our proposal, also available in French and English.

Whereas:

  1. Causation: Scientific evidence indicates that greenhouse gas (GHG) emissions from burning fossil fuels and other sources are causing rising global temperatures,
  2. Mitigation: A return from the current concentration of over 400 parts per million (ppm) of carbon dioxide (CO2) in the atmosphere to 350 ppm CO2 or less is necessary to preserve a planet similar to that on which civilization developed and to which life on Earth is adapted,
  3. Paris Agreement: In 2015 Canada was among the 195 countries that approved the Paris Agreement as part of the UN Framework Convention on Climate Change. The central aim of the Agreement, which Canada ratified in 2016, is to strengthen the global response to the threat of climate change by keeping global temperature rise this century to well below 2 degrees Celsius and preferably limited to 1.5 degrees Celsius,
  4. Endangerment: Further increases in global temperatures pose imminent and substantial dangers to human health, the natural environment, the economy, national security and an unacceptable risk of catastrophic impacts to human civilization,
  5. Co-benefits: As a result of reductions in non-greenhouse gas pollutants, the measures proposed in this legislation will also benefit the economy, human health and the environment even without consideration of global climate disruption,
  6. Benefits of Carbon Fees: Predictably rising carbon fees on GHG emissions are the most economically efficient, transparent and enforceable mechanism to drive a transition to a low-carbon economy, by giving all businesses and individuals a powerful incentive to reduce their carbon footprints and to develop and make available low and no carbon alternatives,
  7. Twice-Yearly-Per-Person Dividends: Equal twice-yearly dividends from carbon fees paid to each Canadian person will equitably recycle revenue obtained from carbon fees, and can help ensure that families and individuals can afford the energy they need during the transition to a clean energy economy.

 

Therefore the following legislation is proposed:

    1. Equal Twice-Yearly-Per-Person Dividend Payments: The federal government will lead by example and also strongly encourage the provinces and territories to return revenue from carbon pricing directly to households. In provinces and territories where the federal backstop is implemented, the revenue collected from carbon fees in that jurisdiction shall be distributed as twice-yearly per-person-dividend payments in January and July to every household to help ensure that families and individuals can afford the energy they need during the transition to a greenhouse gas-free economy and the dividends will stimulate the economy, 
    2. Border Carbon Adjustments: In order to ensure that Canadian products can remain competitive, carbon fee equivalent tariffs shall be charged for goods entering Canada from countries without comparable carbon pricing. Carbon fee equivalent rebates may also be used to reduce the price of exports to such countries. If alternative mechanisms such as output based pricing systems are used, such measures must be targeted, temporary and transparent,
    3. Rising Carbon Price: The federal carbon price, as outlined in the Greenhouse Gas Pollution Pricing Act 2018, shall be extended to increase past 2022. The annual rate of increase shall never fall below $10/tonne CO2e (adjusted for inflation) until Canada meets our GHG reduction commitments consistent with the goals of the Paris Agreement. Establish CO2 equivalent fees for other GHGs including at a minimum methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons (HFCs), perfluorocarbons, and nitrogen trifluoride,
    4. Phase-Out of Fossil Fuel Subsidies: All existing subsidies of fossil fuels including tax and royalty credits shall be phased out within five years. Support for natural gas must also be phased out as the government has committed to decarbonizing the electricity sector,
    5. Carbon Budgets: In order to reach our commitments under the Paris Agreement’s goals on time, a carbon budget shall be developed to quantify the amount of GHG emissions that can be emitted in total over each 5 year period through 2050. Mechanisms shall be built in to adjust the carbon price as needed to ensure targets are being met,
    6. Complementary Policies: Carbon pricing is the simplest and most cost-effective way to lower GHG emissions, but in circumstances where it is economically advantageous complementary policies should be implemented,
    7. Maintain the moratorium on New or Expanded Coal-Fired Power Plants: The Government of Canada must maintain its plans to phase out coal-fired power plants by 2030,
    8. Seeking Treaties: The Government of Canada shall seek treaties with other countries that encourage adoption of programs similar to the ones provided for in this Act to reduce CO2 and other greenhouse gas emissions.

     

Frequently Asked Questions (FAQs)

Why is Carbon Fee and Dividend Necessary?

 

This legislation will put us on the path of a sustainable climate by reducing our greenhouse gas emissions and transitioning us to a clean energy economy. Since the beginning of the industrial revolution we have increased the level of greenhouse gases, especially carbon dioxide (CO2), in our atmosphere. Scientists warn that this is having a drastic effect on our climate. Changes that would normally take thousands of years are happening in decades. Current concentrations of heat-trapping CO2 are higher than at any time in the entire history of the human species on Earth. In effect, we have covered the Earth with a large blanket of greenhouse gases and the Earth is warming up. The oceans are absorbing this increased carbon dioxide in the atmosphere, making them more acidic. Eventually, this acidity will affect the oceans’ ability to support life.

 

What is a carbon fee?

 

It is a fee based on the amount of carbon in a fossil fuel. Fossil fuels such as oil, gas and coal contain carbon. When burned they release the potent green house gas, carbon dioxide (CO2), into the atmosphere. The fee is based on the tonnes of carbon dioxide the fuel would generate, and it would be collected at the earliest point of entry into the economy — well, mine or port. The fee would start out low — $15 per tonne — and gradually increase $10 each year.

 

What is the difference between a “tax” and a “fee”?

 

A tax has the primary purpose of raising revenue. By contrast, a fee recovers the cost of providing a service from a beneficiary. Since the CCL advocates for revenue-neutrality and a policy that doesn’t grow the government, we are advocating for a fee, not a tax. However, for purposes of discussion you will find carbon tax and carbon fee used interchangeably, and referring to the same type of legislation. This is fine, and don’t let it get in the way of the discussion. The tax or fee do the same thing, which is to include the damage that carbon is doing to our climate, oceans, and health in the price.

 

How much will the carbon fee affect energy prices?

 

The best example would be gasoline. A $10 per tonne increase in the carbon fee would equal about 2 pennies on the price of gas. So if the carbon tax started at $15/tonne, gasoline would go up by about 3 cents per litre the first year and 2  cents each year afterward.

penny

 

What is the dividend?

 

The dividend is defined as the quantity of revenue to be rebated to Canadian households. In this case, 100 percent of the total carbon fees collected are divided up and given back to all households equally. This dividend helps citizens pay the increased costs associated with the carbon fee while our nation transitions to a clean energy economy. Because not everyone uses the same amount of carbon, the majority of Canadian households (about 66 percent) are estimated to earn back as much or more than they pay in increased costs [1].

[1] See our laser talk “Carbon Fee and Dividend” for greater details and references.

 

How does Carbon Fee and Dividend legislation work?

 

Carbon Fee and Dividend legislation puts a fee on the amount of carbon dioxide in fossil fuels. This fee is assessed at the source of the fuel: at the mine, well, or port of entry. The fee starts out low and increases annually in a predictable manner until we reach a safe level of emissions. The fee is collected exclusively at the first point of sale, and 100 percent of the revenues are reimbursed directly to all Canadian households, shielding them from the financial impact of the transition to a clean energy economy. Because the fee (and the price of fossil fuel) goes up predictably over time, it sends a clear price signal to begin using fossil fuels more efficiently or replace them with low emissions energy. That price signal motivates investment to move into low emissions technologies, as the true cost of fossil fuels is brought back onto the balance sheets of those who sell them. The rising cost of fossil fuels increases the demand for low emissions products, making them even less expensive as they reach mass production. This clear and easy-to-understand price signal (increasing fossil fuel costs and decreasing clean technology costs) drive the transition to a low carbon economy. This transition will reduce greenhouse gas emissions, stabilizing our climate and the health of our oceans.

 

What are the consequences if we do nothing?

 

We are already experiencing the warning signs of climate change — more extreme weather, longer droughts, worse flooding, warmer average ocean and surface temperatures, disappearing glaciers, melting ice caps and snow fields, increased land desertification, rising ocean levels, ocean acidification, and the mass extinction of animal species because they cannot move fast enough or adapt soon enough to the changes in their habitat. We are already at climate reinforcing points (when warming speeds up). A good example is the North Pole’s ice cap which is over water. This ice cap has traditionally reflected 90% of the solar radiation, which falls on it, back into space keeping the ocean underneath cold. This icecap is disappearing in the summers allowing the open ocean to absorb most of the heat. This is speeding up the warming of the water and melting of the icecap. Our top climate scientists warn us that we need to bring CO2 levels in our atmosphere back down to 350 parts per million (ppm) or lower. We are currently at 400 ppm and rising by 2-3 ppm annually. This is what is forcing our climate to warm, and because oceans absorb a large percent of this CO2, our oceans are becoming more acidic.

 

How is this legislation fair to businesses, utilities, manufacturers, services, farms?

 

By giving all of the carbon tax back to households — the end users — consumers will be able to pay the higher prices of goods and services caused by the higher price of fossil fuels. This allows businesses to pass along the increased cost and keep market share. Each year the carbon tax goes up, the dividend goes up as well. Everyone is on a level playing field for the first few years. But if businesses do not become more energy efficient and start converting to low-emissions energy, they will become less competitive and lose market share. These market forces will drive innovations in low-emissions technology, creating new business opportunities to develop, produce, install and service these products. This will create millions of new jobs here in Canada. Canadian companies will be able to sell these technologies globally and Canadian companies will become more efficient with the energy they use, making them more competitive worldwide.

 

Why will citizens change to low-emissions technologies if they are given a dividend to pay for the increasing price of fossil fuels?

 

With Carbon Fee and Dividend legislation, it is clear to citizens that prices for fossil fuels will go up every year. Part of their motivation is to save as much of their dividend check as possible rather than spending it on more expensive fossil fuels. They can do this by changing over to energy efficient lighting and appliances, upgrading their insulation or windows, replacing that old oil furnace with a geothermal heat pump, etc. When it comes time to get another vehicle, they would consider one that gets better gas mileage or an all-electric vehicle. They can then buy clean electricity (where available) through their utility to charge their car, getting them off fossil fuels altogether. The motivation is to reduce cost in the years to come. The same is true for investors and for fossil fuel companies: as the fee increases, and the cost of doing business rises with it, the rising dividend will ensure that the true cost of doing business will be paid by those in that business.

 

How will our manufacturers remain competitive?

The CCL legislative proposal calls for placing a border adjustment levy on all imports from countries that do not price carbon similarly, giving no company an incentive to move production to a country that allows them to pollute more at lower cost [2]. Because the Canadian consumer economy is so much more valuable than any other in the world, foreign countries that export heavily to Canada will likely choose to institute a similar carbon price, to avoid sending huge amounts of capital to the US. Either way,Canasdian and foreign manufacturers will lose no ground economically for producing products with a lower carbon footprint.

Additionally, the legislative proposal calls for rebating the border adjustment fee to Canadian companies exporting to countries without similar carbon pricing, leveling the playing field for our companies and complying with the World Trade Organization (WTO).

[2] See our laser talk “Border Tax Adjustment” for greater details and references.

Why will the adoption of Carbon Fee and Dividend legislation put Canada in the leadership position on climate change?

 

Because of the carbon fee border adjustments, exporting countries will either adopt similar carbon pricing, or pay at our border. All countries that adopt similar taxes on carbon are on the same level playing field and can make border adjustments with countries that do not adopt such taxes. This encourages all countries to place similar taxes on carbon. As more nations adopt carbon taxes, worldwide demand brings the best clean technologies to mass market faster, driving down costs and making the transition to a low carbon economy less expensive for everyone.

 

What is clean tech?

 

Clean tech is any technology that reduces waste, increases energy efficiency, or produces low- or no-carbon energy. By reducing waste you actually save energy. Recycling aluminum cans for example, uses only about 5 percent of the energy needed to make aluminum from ore. Energy efficient technologies include Light-Emitting Diodes (LEDs) and Compact Florescent lighting, energy star appliances, efficient building design, high efficiency windows, hybrid and all electric cars, etc. Clean tech includes those technologies that help us use fossil fuels more efficiently. Clean energy (also know as green energy) is energy produced by sources — solar, wind, wave, geothermal, – that do not contribute to total greenhouse gas emissions.

 

How many new jobs will be created if we adopt Carbon Fee and Dividend Legislation?

In the USA 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 Carbon Fee and Dividend!

See our laser talk “Job Results” for greater details and references.

 

What benefits will Canada receive by addressing climate change through Carbon Fee and Dividend legislation?

 

  1. We will stabilize our climate and oceans and slow down the mass extinction of species.
  2. It will put Canada in a position of leadership on climate legislation and in clean technology. Governments will be forced to adopt the same carbon price levels as we do or pay at our ports for the privilege of polluting.
  3. It will decrease our dependence on foreign oil, substituting low-carbon energy made in the U.S. The U.S. spends billions annually on imported oil. When we substitute that for clean energy made in Canada, it creates jobs.
  4. Decreasing our dependence on foreign oil increases our national security. Much of our military budget is spent protecting the free flow of oil and propping up the bad governments that control it.
  5. The transition to clean energy will clean our air of smog, ozone, fine particulate matter and other pollutants caused by burning fossil fuel. It will clean our lakes, rivers, and oceans from the mercury poisoning caused by burning coal, the leachates from coal mine tailings, and salt brines from drilling.
  6. We will gain a sense of national pride by tackling and achieving a tough goal together, leading the world not in the industrial revolution or the information age but in the Clean Technology Revolution. Most of the clean technologies we know of today were developed and tested in Canadian laboratories only to be brought to market in other countries because those governments had national energy policies encouraging the adoption of clean energy. We have already lost millions of jobs by holding on to the centuries-old technology of fossil fuels while other countries are transitioning to clean-energy economies. It is time we regained the lead.

 

Why is Carbon Fee and Dividend better than Cap and Trade?

 

Cap and trade, also called ‘emissions trading’, works by setting a ‘cap’ – a maximum for total emissions within a sector – and then selling and trading permits for the right to pollute up to that cap, which is periodically lowered. It has worked well for pollutants like sulfur gases, but carbon is a different story. Unlike sulfur – an unwanted contaminant – carbon is what gives a fuel most of its energy. It’s emitted not just from huge power plants, but from a billion smaller sources like cars, trucks, trains and planes. Cap and trade requires bureaucracy to select which companies get covered, and the emissions must be measured, reported and verified. The carbon price is bid up and down by market traders, adding another layer of cost. The resulting price volatility creates uncertainty for businesses and investors, stalling decisions to undertake the big projects needed to slash emissions.

Carbon Fee and Dividend is far simpler. It can cover all fossil fuels and all emitters regardless of size — including vehicles. It’s easy to understand and monitor. It more easily lends itself to cross-border policy alignment. Administrative costs for both government and industry are far lower.

Cap and trade proponents tout their policy as ‘market-friendly’, but Carbon Fee and Dividend fits that description better, with less bureaucracy, lower costs, and more predictability.

See our laser talk Carbon Fee Versus Cap and Trade for more details and references.

 

Why target a 90% reduction in 1990 emissions by 2050?

This target was set to keep warming below 2 degrees centigrade. The 2007 IPCC report (AR4*) contains a table for the emissions reductions relative to 1990 emissions necessary to stabilize the climate at different thresholds. The actual range in the report is 80-95% reduction below 1990 levels, so our target reflects the mean of those numbers plus a little cushion to be conservative and get a round number.

[4] Working Group 3, chapter 13. Ref this link for pdf download, page 776.

 

Why the CCL rate of increase in the carbon fee?

Basically, we’re aiming to achieve the IPCC goal of 80-95% emissions reductions below 1990 levels by 2050 [4]. If Carbon Fee and Dividend is enacted, CO2 emissions will decline 33% after 10 years and 52% after 20 years relative to 1990 levels. [5] While the IPCC report states that Annex I countries (which includes the US) need to achieve 25%-40% emissions reductions relative to 1990 by 2020, the CCL bill language allows for adjustments in the rate of increase to meet science-based emissions targets.

[4] IPCC AR4 Working Group 3, chapter 13. page 776.

[5] Regional Economic Modeling, Inc. and Synapse. Summary of “The Economic, Climate, Fiscal, Power, and Demographic Impact of a NationalFee-and-Dividend Carbon Tax.”

Why upstream?

 

A carbon tax may be assessed upstream (at the coal mine, oil well, or fracking site), mid-stream (at the power plants or oil refinery), or down-stream (at the gas pump or at the meter). Canada’s number one trading partner is the USA and our energy systems and economies are intricately linked together. Synchronizing carbon pricing policies across borders will reduce red-tape for Canadian companies that trade North-South. CCL USA has chosen an upstream point to collect the tax because it is simpler to administer and opens the possibility of keeping the carbon price for exports [7]. The export clause of the US Constitution (Art. I, Sec. 9) forbids domestic taxes from being included in exported products. However, there is case law that indicates a “severance fee” does not have to be refunded at the border. A carbon tax can only be considered a severance fee when it is assessed upstream. As climate change is a global problem, making the carbon fee stick to coal, in particular, which is exported abroad, is of interest in solving the global climate crisis. Assessing the fee upstream, while returning 100% of the revenues to households, allows the solution to span the entire marketplace, with no new bureaucracy.

[7] Astoria, Ross. “The Export Clause and the Constitutionality of a National Cap-and-Trade CO2 Mitigation Policy”. Forthcoming in Spring issue of the Georgetown International Environmental Law Review.

 

Why revenue neutral?

 

Academic papers studying a carbon tax indicate that a carbon tax with 100% revenue recycling can boost the economy, even before considering the economic benefits from improved health and less severe climate impacts [8]. Thus, CCL has chosen to advocate for a policy that will restore the climate
and boost the economy.

[8] See our laser talks Revenue Neutrality and Economic Impacts of Pricing Carbon for more details and references.

 

Why a dividend?

 

Academic studies that consider the economic effect of a revenue-neutral carbon fee generally consider a dividend to be less ’economically efficient’ than an approach known as a ‘tax swap’. A tax swap means using the revenue to reduce some combination of payroll, income, or corporate taxes. However, the term ‘economically efficient’ can be misleading. Although tax-swap policies, especially corporate tax swaps, result in a marginally larger economy overall, they may result in undue burden on low-income Americans and the unemployed, including millions of retirees. It is also difficult in practice to achieve revenue neutrality through tax swaps while steadily increasing the amount of the carbon fee, as needed to achieve steady and deep reductions in emissions, because that would require constant adjustments in the size and placement of the tax offsets, not to mention the difficulty in tracking the actual amounts of revenue flows.

Because CCL values simplicity and transparency and will not accept a regressive outcome that unduly burdens the poor; because the difference in economic efficiency is marginal; and because a Dividend will still boost the economy when health and climate benefits are accounted for, Citizens’ Climate Lobby advocates for the only revenue return mechanism that reaches every American. Reaching everyone is indispensable for the success of any carbon price for reasons of both fairness and political durability. A law that creates hardship for low- and middle-income Americans would almost certainly be repealed. Only a Carbon Dividend can simply, transparently, and fairly help everyone afford the price increases, ensuring support of the policy until we have restored the climate, and giving the Main Street economy time to adjust.

 

Why a border adjustment?

Though many other countries have carbon prices in some form [10], none of these are a match for the physics of the climate, and none employ a border adjustment [9]. Without a border adjustment, both Canadian exporters and foreign importers would find themselves with an incentive to relocate production to countries with a more relaxed regime, polluting more for the same good. This is called “carbon leakage“. In the interests of the climate, it is therefore necessary to refund the carbon fee on goods exported and impose a carbon fee on carbon intensive goods imported. While there are widespread concerns about how such a border adjustment could be compatible with World Trade Organization (WTO) law, these concerns are ill-founded. WTO experts have written documents explaining how this could be achieved, and it is clear that the CCL proposal is consistent with the requirements these experts outline [2].

[9] “Climate and Carbon: Aligning Prices and Policies”. October 2013. OECD Environment Policy Paper No. 1.

Who would administer the border adjustment?

 

Revenue Canada under the direction of  the Ministry of Finance, in consultation with the Ministry of the Environment.

Why Twice-Yearly?

Given previous  have been advised by Members of Parliament that this what Revenue Canada can best handle. However, let’s not get too bogged down on this and this is a minor point. It is truly a negotiable point. At CCL we don’t let perfection be the enemy of the good and we seek common ground.

 

Why increase by a dollar amount?

There are three possibilities for increasing the carbon fee: increasing by a dollar amount, increasing by a percentage, or not increasing at all. CCL has chosen an annual dollar amount increase because of simplicity, effectiveness, and the economy.

Simplicity: it is easy to understand that the carbon price will be $15 in the first year, $25 in the second, and $35 in the third, etc. By contrast, you need a calculator to figure out that under S. 332, which uses a percentage increase, the carbon price is $20 in the first year, $21.12 in the second year,
and $22.30 in the third year [10].

Effectiveness: a dollar increase achieves substantial health and climate co-benefits at an earlier date. For example, there are $120 billion in mostly health-related costs incurred each year by the burning of fossil fuels [11]. Fewer emissions today means more lives saved today.

Economy: A carbon fee that doesn’t change in price and still enables us to meet emissions reductions targets needed for a stable climate would have an unwelcome effect on the economy. By contrast, a % increase would not give Canadian businesses the price signal they need to be competitive with European and Chinese companies rapidly developing and deploying fossil-free technologies. A dollar increase strikes a balance between these two extremes.

[10] Senator Bernie Sanders. S. 332: “The Climate Protection Act of 2013”. Introduced Feb 14, 2013.

[11] See the laser talk “Climate Change is a Medical Emergency” for more complete discussion and references.