Having a robust carbon price while protecting the economy

It is widely agreed by scientists that fossil fuel emissions are by far the most powerful cause of climate change.

It is widely agreed among economists that a carbon price is the quickest and most effective way to reduce emissions.

Historically, the problem has been that a carbon price sufficiently robust to be effective would harm low-income households, damage business and fail to win public support.

The ETS (even in the UK version) doesn’t escape this problem; in addition, it only covers roughly 45% of the economy, and cannot be expected to provide the reduction needed to achieve Net Zero by 2050.

Climate Income (CF&D) solves the problem. Briefly, it works like this:

  • A steadily rising fee is collected from fossil fuels at source (as they enter the economy). This corrects what economists consider the worst market failure in history, in which the community itself is forced to cover the true costs (particularly pollution & climate change) of the product.
  • Income from the fee is divided up and (minus the relatively small cost of administration) returned in equal shares to all citizens, as dividends. This enables individuals themselves to make choices that protect them and incentivize green commercial initiatives.
  • A Border Carbon Adjustment imposes a similar fee on imports from countries lacking a carbon price, and refunds the fee to exports from the home country. This not only protects home industries and stops industry ‘leakage’, but incentivises carbon pricing in importing countries – the most effective method of creating global momentum.

Internationally, interest in the policy is accelerating, the most notable examples being Canada and the US.

In 2018, 10 years after its successful implementation in British Colombia, it became the backstop policy for the whole of Canada, and was overwhelmingly sanctioned by Canadian voters in 2020.

In the U.S., studies show that the bi-partisan bill HR763, with a starting price of $27/ton, will reduce emissions by 40% in just 12 years.

Previous analysis by REMI’s (Regional Economic Modeling Inc) concluded that, during the first 20 years alone, the US version would lead to:

  • A 50% reduction of carbon emissions below 1990 levels
  • The addition of 2.8 million jobs above baseline, driven by the steady economic stimulus of the energy dividend
  • The avoidance of 230,000 premature deaths due to reduction in air pollutants that often accompany carbon emissions

With increasing awareness of the damaging effects of pollution, this last consideration should rank high in delivering a post-Covid recovery – especially given the huge financial co-benefits of avoided health costs. (Canadian studies show that by 2050, Canadians will avoid $107.6 billion a year in health costs out of their taxes).

However, the biggest challenge to implementing ambitious carbon pricing is political acceptability.

Thus, perhaps one of the most powerful endorsements is from Lord Nicholas Stern, Chair of the Grantham Research Institute on Climate Change, who himself, as co-author of Making Carbon Pricing Work for Citizens, calls for the return of revenues to citizens – a ‘cheque in the post’ for households – to win over the public.

To sum up: The policy is simple, effective, transparent and above all, fair – those who use more carbon-based product will pay more. It grows jobs, it saves lives, it supports green initiatives and promotes green businesses; it rewards green choices – which at present are almost always the most costly alternative – and it costs government almost nothing.

Written by Judy Hindley, CCL UK co-founder