What is Carbon Fee and Dividend?
The basics of the Fee and Dividend policy are explained on our Policy page. Check out the 2-minute video to learn more.
Why do we need Carbon Fee and Dividend?
Primarily, it is meant to drive the decarbonisation of our economy from the bottom up. This is achieved by giving a financial incentive to households and the businesses that serve them to seek out products that consume less or no carbon. It also helps mitigate the indirect health and environmental costs of climate damage, which are impossible to quantify on an individual basis, but which residents are already paying through taxes to cover disaster relief and infrastructure degradation, higher insurance costs, and higher healthcare costs. The burden of the carbon fee should not be piled on top of those; it should be borne by the fossil energy companies and their owners and investors. But since energy companies will pass some portion of the carbon fee costs to consumers, families will need the Dividends to help offset those extra costs in an equitable way, while also providing households with more cash to invest in ways to reduce their carbon footprints.
What is the difference between Carbon Fee and Dividend and other schemes?
We have written in-depth about different ways of pricing carbon, including a handy comparison table: “Carbon Pricing: Be Careful What You Ask For”.
But even carbon fee and dividend is now known by many names, so if you see any of these you should worry less about the differences and more about their similarities:
- Carbon Fee and Dividend
- Climate Income (EU)
- Energy Innovation and Carbon Dividend Act (USA)
- Greenhouse Gas Pollution Pricing Act (Canada)
Would carbon fee and dividend work to stave off climate change?
There is widespread agreement a price on carbon is necessary to keep climate change within limits. The Nobel prize in Economics in 2018 was awarded to this very idea, and governments, think tanks, and academics from across the political spectrum advocate for such policies. Even fossil fuel companies are on board with the idea! For more in-depth reading on why carbon pricing would work, please read a UK report by Policy Exchange, several studies on the CCL USA website, or read the Wikipedia page on carbon pricing.
If it works so well, why isn’t every country implementing Carbon Fee and Dividend?
Despite its undeniable effectiveness, there are several reasons carbon pricing remains challenging to implement:
- Fossil fuels gave us our current standard of living and are involved in virtually everything we consume (through transport, plastics, electricity, heat). Raising the price of fossil fuels will raise prices for the majority of goods – though by how much depends on the product’s reliance on fossil fuels. The point of the dividend is to offset this increase in prices, rewarding those consumers who avoid carbon-intensive products. Nonetheless, such a price increase has turned out to be a hard sell to electorates (e.g. the French Gilets Jaunes protest started over an increase in fuel prices) and therefore politicians are reluctant to engage.
- If the UK introduces a price on carbon, UK businesses will be inclined to move their factories to another country and import the goods instead. This is known as “carbon leakage” – the UK’s emissions would drop but emissions elsewhere would go up. Critically, it means any country that implements a carbon price is less competitive in the short run due to higher costs of production. This is why any serious plan for carbon pricing comes with a solution for border adjustments to prevent carbon leakage. We have written about this in detail: “How international trade makes saints out of sinners“. Or you can find more details here.
- In some places other carbon schemes are already entrenched, such as the European Emissions Trading Scheme
How does Brexit affects Carbon Fee and Dividend?
We have written about Brexit and climate policy: “Carbon pricing after Brexit“
Would an increase in prices not mostly hurt the poor?
This is a pervasive myth, when in fact a carbon fee and dividend would increase equity. We have written about this in detail: “The Myth that Carbon Taxes hurt the Poor“