You don’t want new taxes? Neither do we

The carbon fee & dividend scheme is the most efficient way to make polluters pay for decarbonising the economy, while protecting consumers.

 

Since its foundation, CCL has been advocating in favour of a carbon fee & dividend scheme to reduce carbon-dioxide emissions. Every fossil-fuel producer will have to pay a fee for each tonne of carbon dioxide that its products (coal, oil, natural gas, …) will release into the atmosphere. The money collected via this scheme will then be given back to all citizens via a monthly cheque. This simple mechanism will incentivise producers to cut their carbon emission with no harm to consumers.

When discussing this approach, skeptics often comment by saying: Australians don’t need another tax. Taxes (like the GST, income tax, real-estate stamp duties, etc.) are compulsory transfers of wealth from the citizens to the government in order to fund its operations. The gut reaction is understandable: no one likes taxes. However, a carbon fee & dividend scheme does not cause a net loss of wealth to consumers, hence it is not a tax.

To see that the carbon fee & dividend is not a tax, let’s see in more detail how the “fee” and the “dividend” work.

The fee

Over the past decade renewable energy sources have undergone a massive expansion. The goal of a carbon fee & dividend scheme is to further speed up this process to meet the goals of the 2015 Paris Agreement. Source: International Energy Agency.

With the carbon fee in place, fossil fuel companies will have to pay an amount of money proportional to the carbon dioxide emitted by their products. In the meantime, cleaner sources of energy – for which the carbon fee will not be applicable – will become relatively more competitive. This will lead to increased investment, which in turn will improve the technology and hence further reduce prices. Far from being a mere hypothesis, the progressive drop in prices of renewables is already a fact. The carbon fee will simply speed it up to meet the goals of the Paris Agreement.

At this point however, skeptics get worried and ask: will electricity prices increase? The answers is “yes” but – crucially – less than you might think.

With the carbon fee in place, fossil fuel producers will be facing a dilemma. On one hand, if they do not increase their products’ prices enough, their profits will be squeezed and their investors will fly away to other – more profitable – investments. If they do increase their prices too much, however, they will become uncompetitive compared to cleaner sources of energy (like solar, wind or hydro) that are not subject to the carbon fee. For this reason, fossil fuel producers will indeed increase their prices, but not enough to completely offset the carbon fee. Because of this constraint, carbon polluters will not be able to pass the entire carbon fee to consumers, who will therefore end up paying only a fraction of it. But even if they did, consumers are still compensated.

The dividend

The dividend component is much easier to understand. The amount of money that is raised as a carbon fee will be deposited regularly in the bank account of each Australian.

And the winner is… you!

Let’s put everything together. On one hand we have money raised partially from fossil-fuel producers and partially from consumers as a “fee”. On the other, this money is given back only to consumers as a “dividend”. Hence, consumers (that is, you and me) will be better off. The net effect of the scheme will be a transfer of money from polluters to consumers.

Can we call a “tax” a mechanism that makes everyday Australians richer? If so, we might really need more of these taxes.

 

To learn more about the economics of Carbon Fee & Dividend…

Dr Simone Belli is a CCL member from the electorate of North Sydney, NSW.