A Carbon Fee and Dividend for Australia

A Climate Dividend for Australians

BREAKING! Dr Kerryn Phelps launched The Australian Climate Dividend Plan (ACDP, 9Mb pdf) by UNSW professors Richard Holden and Rosalind Dixon. Read more here (Ross Gittins), here (The Conversation) and here (Rod Mitchell).

This carbon dividend model is a visionary and game-changing mode of equitable carbon pricing where it forms part of the UNSW Grand Challenges Program, with similar plans being considered and/or implemented in Ireland (watch) and Canada (CCL blog).

CCL Australia Advisory Council member Dr Dennys Angove (right) was there to congratulate the authors, Richard Holden (left) and Rosalind Dixon. 

About CCLs Carbon Fee and Dividend

Why do we advocate for a CFD

A carbon fee is a fee levied on the amount of carbon dioxide equivalents emitted, e.g. by a fossil fuel, an industrial process or a type of land use. While acknowledging the significant contribution of all sectors to global warming and climate change, and the potential for all sectors to mitigate it, our fee would focus solely on the pollution due to extraction and burning of fossil fuels such as oil, gas and coal, all of which contain carbon.

When extracted and/or burned, fossil fuels release potent greenhouse gases such as carbon dioxide (CO2) and methane (CH4) into the atmosphere. The fee levied would be based on the tonnes of carbon dioxide equivalents, at Global Warming Potential (GWP) – e.g. GWP100 for CO2 and GWP20 for methane – that the fuel would release into the atmosphere. This fee would be collected at the earliest point of entry of the fuel into the economy, at the oil or gas well, mine, pipeline or port. The fee would start low, e.g. $15 per tonne or the current traded price, and gradually increase at a predetermined level, e.g. $10 per year. When the fee had reduced emissions from fossil energy use to 10% of 1990 levels, the fee would be removed.

What is the difference between a ‘tax’ and a ‘fee’?

A tax has the primary purpose of raising revenue. A fee, by contrast, recovers from a beneficiary the cost of providing a ‘service’ or a ‘compliance cost’. Since CCL advocates revenue neutrality and a policy that doesn’t grow government, we are advocating a fee, not a tax.

For the purposes of discussion, you will often find ‘carbon fee’ and ‘carbon tax’ used interchangeably. This is fine. Don’t let terminology get in the way of discussion about the cost of the damage that carbon from fossil energy extraction and use is doing to the climate, and thus to farming, oceans and health.

How much will the carbon fee affect energy prices?

In the case of petrol or diesel, for example, each $1 per tonne increase in the carbon fee would mean a rise of about a 0.25 cents on the price of one litre of petrol. So, if the carbon fee started at $15 per tonne and rose by $10 per year, petrol would go up by about 5 cents per litre the first year and slightly over 3 cents each year thereafter.

What is the dividend?

The ‘dividend’ in this case is the payment that would be returned to Australia’s households as a rebate. The total carbon fees collected, minus administrative costs, would be equally divided between and given back to all households. This dividend would help people to pay the increased costs associated with the carbon fee while our nation transitioned to a clean-energy economy. Because not everyone uses the same amount of carbon, the majority of households (about 66%) are estimated to receive back as much, or more, than they would be paying in increased costs.

Has the impact of a Carbon Fee and Dividend been modelled?

An Australian CFD is yet to be modelled. However, in the United States, a comprehensive study has been undertaken by Regional Economic Models, Inc. (REMI) https://citizensclimatelobby.org/remi-report/ and it shows that a carbon fee and dividend scheme would have favourable impacts on the US economy. The study found that:

  • carbon emissions from fossil energy would decline 33% after 10 years, and 52% after 20 years, relative to 1990 levels
  • economic activity would be stimulated by 5% over ‘business as usual’
  • 66% of people would be better off financially
  • 100% of low- and middle-income households would be better off financially.

With 100% of net revenue returned to households and a significant majority of consumers coming out ahead of rising costs, people would have more disposable income, which would encourage spending, GDP would grow and emissions fall steadily, while total investment in the energy economy would expand.

How would Carbon Fee and Dividend legislation work?

CFD legislation would put a fee on carbon dioxide equivalents attributable to the use and extraction of fossil fuels. This fee would be assessed at the fuel’s source: at the mine, well or port of entry. The fee would start out low and increase annually in a predictable manner until Australia reaches a ‘climate-safe’ level of emissions. The fee would be collected exclusively at the first point of sale, and all fees collected, minus administrative costs, would then be reimbursed directly to all Australian households. This would shield them from the financial impact of the shift to a cleaner energy economy and allow them a choice in their purchases during this transition.

Because the fee and the price of fossil fuels would go up predictably over time, CFD would send a clear price signal to businesses and the wider economy to:

  • begin using fossil fuels more efficiently
  • replace fossil fuels with low-emissions energy
  • invest in low-emissions technologies
  • bring the true cost of fossil fuels onto the balance sheets.

This would:

  • increase the demand for low-emissions products, making them even more affordable as they reached mass production
  • drive growth to a new economy
  • reduce greenhouse-gas emissions, which would gradually restabilise the climate, farming and the health of oceans.

Wouldn’t it be expensive to impose the fee?

No. The costs of administering and enforcing the collection and processing of a carbon fee and dividend would be proportional to the number of fossil fuel firms that paid the fee. Collecting a carbon fee from a few hundred fee-payers, at the point where the fossil fuels entered the economy, would be a relatively simple and low-cost activity. This is because the number of fee-payers –  businesses from whom fees are collected – could be kept to an absolute minimum.

How would this legislation be fair to businesses, utilities, manufacturers, services and farmers?

By giving all of the net revenue recovered back to households — the end-users — consumers would be able to pay the higher prices of goods and services caused by the higher price of fossil fuels. This would allow businesses to pass on the increased cost and keep market share. Each year that the carbon tax increased, the dividend would go up as well. Everyone would be on a level playing field for the first few years. But if businesses failed to become more energy efficient and failed to start converting to low-emissions energy, they would become less competitive and lose market share. Market forces would therefore drive innovations in low-emissions technology, creating new business opportunities to develop, produce, install and service these products. This would create thousands of new jobs here in Australia. Companies would be able to sell these technologies globally and become more energy-efficient themselves, thereby becoming more competitive worldwide.

Why a dividend?

Academic studies concerned with the economic effect of a revenue-neutral carbon tax generally consider a dividend less beneficial than a tax swap, but nonetheless still very beneficial. A ‘tax swap’ involves using revenue from putting a price on carbon to reduce any combination of payroll, income or corporate taxes. However, these studies also say that, although these tax-swap policies, especially corporate tax swaps, result in a marginally larger economy, extra measures then have to be implemented to help the poor, because no tax swap will help the unemployed, including the millions of retirees.

Because CCL values simplicity and transparency, because economists say the poor must be taken care of, because the difference in economic efficiency is marginal, and because a dividend would boost the economy even when health and climate benefits were accounted for, the CCL advocates for the only revenue-return mechanism that would reach every Australian. Giving everyone a dividend would be indispensable for the success of any carbon price because when petrol and diesel are 26 cents per litre more expensive (as they would be in the scheme’s tenth year according to CCL’s policy) low-income households, who are disproportionately reliant on private vehicles, would not be able to afford their fuel under any of the tax-swap mechanisms which would make any such mechanism unfair and unpopular.

Only a dividend could simply, transparently and fairly help everyone afford inevitable price increases, ensuring support of the policy from business and the public while at the same time giving the ASX, finance sector and the rest of the economy adequate time to adjust.

Has a Carbon Fee and Dividend been implemented?

Not yet. The most comparable example is a revenue-neutral carbon tax in the Canadian province of British Columbia. It combines business tax relief (or ‘tax swap’) with compensation to households, with the result that British Columbia has reduced emissions and grown its economy. A comparable dividend and fee mechanism is set to serve as a federal ’backstop’ to state carbon pricing measures in Canada from 2019.

How would Carbon Fee and Dividend work alongside other existing policy?

International: In France, President Macron has called for a border adjustment tax that would levy imports from places where the goods are not subject to a carbon price. The CFD recommended by CCL includes this feature. If adopted by bigger economies, border adjustments could be a strong signal to other nations that it would be rational and timely to price their carbon emissions too.

In terms of Australia’s international commitments, there is no reason that a CFD would not enable us easily to exceed our Paris commitments and fulfil our commitment to the ‘Coalition of High Ambition’.

Other nations, including Australia’s key trading partners, have already surpassed our efforts to mitigate climate change. The consequences of not acting promptly as a global community will be dire. With Australia’s domestic emissions per capita around four times the world average, we may well be more actively encouraged to play our part in the future.

National: Due to recent downward adjustment and its high rate of uptake, the Renewable Energy Target (RET) has reached early redundancy and it is unclear if or how the National Energy Guarantee (NEG) would be an improvement. Unless a decision is taken to expand the RET or the NEG, a CFD would fill a vacuum. It also has the potential to be overarching and cross-sectoral, distributing the costs across the whole economy and ensuring benefits to business are also distributed across the economy, unlike policy mechanisms confined to the electricity sector.

CFD would be a more efficient and transparent scheme than the Carbon Pollution Reduction Scheme (CPRS) introduced in Australia in 2012 and then rejected by Parliament (and repealed in 2014). Neither can the budget afford to top up the Emissions Reduction Fund, which in any case is not setting a reliable price signal to the economy.

State policies should be reviewed and revised should a stable, effective carbon price, like CFD, be founded on political bipartisanship.

Has the impact of an Australian CFD system been modelled?

This is an important next step. Economic modelling of an Australian CFD would enable policy analysts and decision-makers to understand how different sectors and regions would be affected by the scheme. Information from such a study could help in the design of an optimal mix of policies to effectively, efficiently and equitably transition Australia’s economy.

Lessons learned from overseas, from our trading partners, our neighbours, our Commonwealth partners and our partners in the Coalition of High Ambition, as well as from internal pricing, the way leading businesses are undertaking carbon pricing, would see Australia able to strike the right note on implicit and explicit carbon pricing.

Why is bipartisan support not only good, but realistic?

Between about 2007 and 2010 there was bipartisan political support for carbon pricing in Australia. What is generally understood to have happened subsequently is that international failure to agree on a path forward led to a critical dip in support for what could have been perceived as Australia taking a lead on climate action.

Post-Paris, there is far greater momentum for carbon pricing, including in China. There has also been a revolution in renewable energy technology and its uptake, and mainstream business and community opinion has become more supportive of reform.

Unfortunately, CFD was unheard of in Australia when the former political bipartisanship collapsed. CCL believes that the dividend to households proposed as part of the CFD, and the simplicity and transparency of the scheme, would improve the potential for achieving a return to bipartisan support for a solution to climate change. The CFD is easy to explain. People are more likely to understand it, and there would be even greater trust if specifics like dividends to households were clearly enshrined in law.

With CFD, 100% of the money collected in fees would be recycled into the economy via the carbon dividend paid each month to households. In the US, REMI modelling strongly suggests that most households would be financially better off if a CFD were implemented, and we expect the Australian economy likewise would benefit from an Australian CFD.

In the US, 84 members of Congress – 50% Democrats and 50% Republicans – have formed a Climate Solutions Caucus. This Caucus addresses the urgent need to foster respectful bipartisan dialogue as a way to help solve dilemmas of climate and energy policy like the very severe and complex ones Australia faces today.

Bipartisanship would help create effective and durable policy, which is an important expectation of the business community in particular, many members of which are waiting for and already factoring in a rising carbon price. But the expectation of an effective and durable policy on mitigation of climate change extends far beyond just the business community.

Wouldn’t such a carbon fee hurt Australian business in the world market?

No. This is because the Carbon Fee and Dividend scheme would have a provision built in to protect competitiveness in trade. Known as a ‘Border Carbon Adjustment’ (BCA), it would be imposed on carbon-intensive trade-exposed goods that crossed our border in either direction [1,2]. Products imported from a country that did not impose a carbon price equivalent to ours would have to attract a surcharge to make up the difference. Conversely, an Australian-made product exported to such a country would attract a refund from the carbon fees fund held by the Australian Government equivalent to the carbon fee associated with the product’s carbon footprint.

This BCA would prevent Australian manufacturers from being placed at a competitive disadvantage in global markets because of the carbon fee. It would also remove the incentive for them to relocate overseas to avoid such a fee, and thereby prevent ‘carbon leakage’. In addition, it would encourage foreign countries to adopt their own carbon fee so that they would get the money instead of us. Carbon Fee and Dividend’s BCA is designed to comply with the laws of international trade [3,4].

Note that exported fossil fuels don’t attract a refund from a border carbon adjustment. Our proposal does not include a refund for Australian-produced fossil fuels that are exported, and imported foreign oil has the same carbon fee placed on it as domestically produced oil. The BCA applies only to carbon-intensive products, not fuels.

 

‘It’s not a tax if the government doesn’t keep the money.’ George P Shultz, former US Treasury Secretary and Secretary of State

 

  1. Carbon Fee and Dividend (CFD) would meet the objective of causing minimal disruption to the economy and climate while giving a strong and positive signal to markets.
  2. 100% of net revenue collected would be returned directly to households through monthly ‘dividend’ payments (minus administrative costs).
  3. The dividend would give most consumers greater purchasing power, enabling all households to afford to play their part in the mitigation of climate change. This is a distinctive and important feature lacking in other systems of carbon pricing, including the Carbon Pollution Reduction Scheme (CPRS) and the subsequent Clean Energy Future carbon pricing scheme introduced in Australia in 2012 and then repealed in 2014.
  4. Businesses would be given incentives to increase energy efficiency and could at the same time be assured that customers could meet any increased costs resulting from the carbon fee.
  5. CFD would strongly reduce greenhouse-gas emissions while growing the economy and saving lives.
  6. The system is efficient and would provide good value.
  7. CFD is simple and transparent. It would distribute costs across the economy and avoid the pitfalls associated with governments intervening to favour powerful vested interests or to ‘pick winners’.
  8. The system is fair. It combines individualism (allowing markets and individuals to choose in response to price signals) with egalitarianism (allowing both inter- and intra-generational equity).
  9. CFD would be a positive solution that all political parties can support.

The context

Australia’s commitment to the Paris Agreement, to ‘… pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels’, is in jeopardy.

Opinion polls consistently show that a vast and growing majority of the Australian public want the Australian Government to adopt a non-partisan approach to effective climate policy and to do what is required to mitigate climate change.

Business groups have called for a market-based mechanism to cut emissions, and many are already making commitments on the assumption that there should be a stronger, regulated, long-lasting global and national carbon-pricing mechanism as part of the Paris Agreement.