ACE

Author: Jordan Manley

  • Intro to Carbon Taxes and Credits: Part 2

    Intro to Carbon Taxes and Credits: Part 2

    Carbon Fee & Dividend

    This brief is the second in a 4-part series on carbon tax and credit policy in the United States: carbon tax, carbon fee & dividend, cap & trade, and discussion.

    A fee and dividend system (FDS) incorporates a traditional carbon tax, a “fee”, and a “dividend”, which is a check that is equally distributed to qualified citizens without any spending stipulations. A carbon tax is a fee on emissions that aims to reflect the additional costs created by fossil fuels while also providing a financial incentive to switch to more renewable sources of energy.

    How it Works

    An FDS would tax firms producing fossil fuel emissions which are harmful to the environment, but instead of the tax revenue going to the federal government (a traditional carbon tax) it would be distributed to citizens periodically. Essentially, citizens become shareholders for the environment, and when the environment is impacted through fossil fuel emissions, citizens are compensated. The amount of compensation is dependent on the level of carbon taxation (current proposals range from taxing carbon at $20-150/metric ton).

    Currently, the US runs a dividend program through the Alaska Permanent Fund (APF) which returns surplus revenue from state-owned oil and gas reserves to eligible Alaskans. The Alaska Fund does not tax carbon and does not provide a strong incentive to reduce emissions, but is a working example of distributing equal lump-sum payments to citizens. 

    Carbon Fee & Dividend Legislation

    FDS legislative bills have since been introduced in the 116th Congress, such as the Climate Action Rebate Act (introduced by Sen. Coons and Sen. Feinstein). This bill calls for an initial fee of $15/metric ton and would increase by $15 annually. The revenue would be partially distributed in taxable carbon dividends, partially put towards research and development, and partially invested in transitional assistance. A similar bill is the America’s Clean Future Fund Act (introduced by Sen. Durbin) which includes a similar carbon pricing system, but 75% of the tax revenue is returned as a dividend while the rest is invested in clean energy and transition efforts. More recent fee and dividend developments include The Energy Innovation and Carbon Dividend Act (introduced by Rep. Deutch in the 117th Congress). While many examples of such bills exist, each maintains differences in their implementation or distribution. See this carbon pricing bill tracker for more information.

    Benefits and Downsides

    An FDS can reduce harmful emissions and stimulate the economy by incentivising companies to reduce carbon outputs while sparking innovation and competition in the private sector. A recent study found that an FDS could reduce carbon dioxide emissions by 52% below 1990 levels after 20 years. The same study also found that recycling the revenue back into the economy through dividends could create nearly 2.8 million jobs. Additionally, one of the main drawbacks of a carbon tax is that it can disproportionately impact low-income households who spend a large share of their income on emission intensive products. A Fee and Dividend System has the potential to make a regressive carbon tax progressive by rewarding poorer households, who typically have smaller carbon footprints, with higher payouts than their larger, wealthier counterparts. For this benefit to stand, progressive dividends would need to be written into the FDS legislation.

    One key benefit of the carbon tax is the opportunity to raise funds to invest in green technology. If the revenue from the carbon tax is instead distributed to citizens, it will have less impact in stimulating a green economy and providing aid to areas suffering from the impacts of climate change.

    Since the core of a fee and dividend is a carbon tax, there are similar drawbacks to this policy. Without certain mechanisms or safeguards in place, like border carbon adjustments, there is a high risk of outsourcing.

  • Intro to Carbon Taxes and Credits: Part 1

    Intro to Carbon Taxes and Credits: Part 1

    This brief is the first in a 4-part series on carbon tax and credit policy in the United States: carbon tax, carbon fee & dividend, cap & trade, and discussion.

    A carbon tax is a fee on emissions that aims to reflect the additional costs created by fossil fuels while also providing a financial incentive to switch to more renewable sources of energy. There are several aspects of a carbon tax to consider: 

    1. The scope: which types of greenhouse gases and industries are subjected to the tax 
    2. the point of taxation: the part of the supply chain being directly taxed 
    3. Border carbon adjustments: a tool to maintain global competition by taxing imports and compensating exports that are coming from and going to countries without a similar carbon tax 
    4. Regulatory pauses: a pause on overlapping EPA emissions regulations
    5. Distribution options: how the tax revenue is distributed

    Currently, no carbon taxes have been implemented in the United States at a federal or state level, but multiple bills have been recently introduced in Congress.


    Figure 1: Highlights the tax rates under the many carbon tax proposals introduced in Congress, which range from taxing carbon at $20/metric ton to $150/metric ton.


    Figure 2: Highlights specified allocation strategies under the many carbon tax proposals introduced in Congress, including tax cuts, national deficit reduction, subsidies to renewable energy, and lump-sum dividend payments.

    Benefits of Carbon Taxes

    First, carbon taxes have the potential to raise a large amount of revenue, which can be used to reduce other taxes, subsidize green energy, or pay costs related to pollution, such as oil spills and contaminated air. A 2017 study by the U.S. Department of Treasury estimated that a $49/metric ton tax on carbon dioxide (that steadily increases to $70/metric ton after 10 years) could raise nearly $2.2 trillion in net revenue from 2019 to 2028. 

    Second, carbon taxes have the potential to reduce emissions quickly; however, this depends on the tax rate and how much the tax increases over time. One example of these drastic emission reductions was highlighted in a joint paper from the Urban Institute and Brookings Institution. The estimate found that an initial $20/metric ton tax that grows 5% faster than inflation per year could reduce emissions by over 20% after 15 years and over 30% after 35 years. Sweden implemented a carbon tax in 1991 and has seen a 25% reduction in emissions since 1995, while their economy expanded 75%. Today, Sweden taxes carbon at USD $127/metric ton.

    Downsides of Carbon Taxes

    First, without implementing certain allocation strategies, a carbon tax can be regressive. Firms which produce carbon-intensive goods (like energy companies) will be forced to raise their prices if they are unable to sufficiently reduce emissions. Lower-income households spend a larger proportion of their income on carbon-intensive goods, such as gasoline and electricity, so a tax on carbon would burden those individuals more than high-income households by making the goods they purchase more expensive.

    A carbon tax may increase the risk of potential outsourcing. Companies may relocate their manufacturing processes to countries with fewer restrictions on emissions, making the U.S. less competitive in the global market. In theory, border carbon adjustments attempt to reduce this outsourcing risk through taxing imports based on their carbon footprint, levelling the playing field for domestic industries by raising the price of goods produced in countries without a carbon tax. However, there are still numerous complications in determining the taxes and rebates to be implemented. 

    Carbon taxes have historically been politically unpopular in the United States. Many consumers are adverse to new taxes, especially if they believe the tax is not “revenue neutral,” meaning that overall tax revenue to the government does not change. However, recent polling by the Yale Program on Climate Communications found that 67% of registered voters supported a tax that forced fossil fuel companies to pay for their emissions as long as that revenue was used to reduce other taxes to remain revenue neutral. More recently, a 2020 Pew Research Center poll found, for the first time ever, more than 50% of Americans reported that protecting the environment and combating climate change should be a top priority for the President and Congress.

  • Jordan Manley, University of Michigan

    Jordan Manley, University of Michigan

    Jordan (she/her/hers) is a sophomore at the University of Michigan studying Environmental Science with a specialization in Environmental Policy. Her goal is to help businesses and communities become more sustainable by transforming policies related to energy, transportation, housing, and agriculture. While at Michigan, Jordan has worked on sustainability projects ranging from urban farming to clean energy research to helping an environmental consulting firm fight against the Line 5 oil pipeline. She hopes to continue her environmental research and advocacy with ACE and her local Citizens’ Climate Lobby chapter in Ohio. During her free time, Jordan loves hiking, reading, and listening to music.