Carbon Fee and Dividend

Carbon Fee and Dividend

 

Carbon Fee and Dividend is an efficient and transparent carbon pricing mechanism that drives greenhouse gas emissions reductions across most sectors of the economy. It makes  the many different climate solutions that are needed to stabilise our climate much easier to implement.

A steadily-rising fee is placed on the carbon content of fossil fuels upstream – at the mine, well, or port of entry. The net revenue is returned evenly to every household through monthly ‘dividend’ payments. There are several benefits to this approach:

 

BENEFITS

  • Investors, producers, consumers and governments are all given an incentive to increase energy efficiency and transition away from carbon- intensive activity.
  • The fee encourages greater investment, research and development in low carbon projects.
  • The dividend (100% of revenue) protects lower and middle income families, maintains public support and give consumers greater purchasing power, enabling all households to play their part in the mitigation of climate change. 
  • The dividend  stimulates the economy while giving a strong and positive signal to markets.
  • The fee helps create thousands of low-carbon jobs

Carbon Fee and Dividend is the preferred climate solution of CCL in the United States and is steadily gaining support in the US Congress as the Energy Innovation and Carbon Dividend Act.  A variant called Climate Dividends Plan is advocated by the Climate Leadership Council, a conservative Washington-based think tank.

Australian Climate Dividend Plan

In 2018, as part of the UNSW Grand Challenges Program, University of New South Wales professors Richard Holden and Rosalind Dixon modelled a modified version for the Australian economy and presented it as the Australian Climate Dividend Plan (ACDP). 

The ACDP puts a price of AU$50 per metric tonne (MT) on the carbon emissions from electricity, direct combustion, transport, mining and industrial processes. The revenue is returned, evenly, to every voting-age Australian citizen as a dividend, representing a tax-free payment of approximately $1,300 per person per annum.

A UNSW survey in November 2019 found that 65% support a tax on companies that produce carbon specifically to encourage a reduction in emissions. That support rises to over 73% if it is explained the tax is redistributed to taxpayers and is designed to lower emissions and encourage investment into technology to achieve this.

Click on the link for more info about the Australian Climate Dividend Plan (where you can also download the full PDF version of the report).  

Read more here (Ross Gittins), here (The Conversation), here (Rod Mitchell) and here (UNSW Newsroom).

 

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

Carbon Fee and Dividend FAQs

 

Why do we advocate for a Carbon Fee and Dividend?

A carbon fee is levied on the amount of carbon dioxide equivalents emitted,  by burning 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 the 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 upstream, 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 will have done its job and will be retired.

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 monthly direct credit. 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 70%) 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?

A variant  of CFD has been modelled by UNSW and presented as the Australian Carbon Dividend Plan. In the United States, a comprehensive study was undertaken by Regional Economic Models, Inc. (REMI) and found that under a carbon fee and dividend scheme:

  • 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, stimulate the economy and expand total investment in the energy economy.

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:

  • use 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 sheet

This would:

  • increase the demand for low-emissions products, making them even more affordable as they reach mass production
  • drive growth in the new economy
  • reduce greenhouse-gas emissions, thus stabilising the climate and restoring the health of oceans.

Wouldn’t it be expensive to impose the fee?

No. The costs of collecting and administering fee and dividend would be proportional to the number of fossil fuel firms that paid the fee. Collecting a fee from fossil fuel producers and importers would be a relatively simple and low-cost activity. 

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 reduce thier emissions, 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.

As the difference in economic efficiency is marginal, CCL prefers the simplicity and transparency of the dividend because it protects lower-income people and boosts the economy even when health and climate benefits were accounted for.  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?

Known as the Federal backstop, a carbon fee and dividend policy has been operating in Canada since 2018 in three provinces and two territories that do not have their own carbon price. 

British Columbia has had a revenue-neutral carbon tax since 2008 that has reduced emissions and while the economy has grown more than the rest of Canada. It combines business tax relief (or ‘tax swap’) with compensation to households. 

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?

Yes. In 2018, UNSW Professors Richard Holden and Rosalind Dixon produced the Australian Climate Dividend Plan (ACDP) which modelled a carbon fee and dividend scheme and provided independent household impact modelling for Australia. This is an important step, as this economic modelling of an Australian CFD enables policy analysts and decision-makers to understand how different sectors and regions would be affected by the scheme. Information from this report 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.  Carbon Fee and Dividend scheme includes Border Adjustment to ensure competitiveness and protect business from unfair competition from countries with out a carbon price.  [1,2]. Products imported from a country that did not impose a carbon price equivalent to ours would have to attract a surcharge or tariff to make up the difference. Conversely, an Australian-made product exported to such a country would attract a rebate 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].

Until such time as border adjustments are adopted by major global economies a Border Adjustment would make Emission-Intensive and Trade-Exposed (EITE) industries unlikely to survive. An interim Output Based Climate Pricing System solves this problem while still giving industries an incentive to progressively reduce their emissions.

 

‘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 effective.
  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 their 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.

 

Similar revenue neutral dividend-based climate policies, under which all net revenue is returned directly to all voters or householders, are currently being considered and/or implemented in Ireland (watch) and Canada (CCL blog).