An equitable carbon fee and dividend should be set to a price level necessary to achieve GHG reduction goals; kicker payment should be set so 70% of people receive a net income after paying carbon tax or at least break even.
By Garlynn Woodsong
Editor’s note: City Observatory is pleased to publish this commentary by Garlynn Woodsong. Garlynn is the Managing Director of the planning consultancy Woodsong Associates, and has more than 20 years of experience in regional planning, urban analytics and real estate development. Instrumental in the development and deployment of the RapidFire and UrbanFootprint urban/regional scenario planning decision-support tools while with Calthorpe Associates in Berkeley, CA, his focus is on making the connections between planning, greenhouse gas emission reductions, public health, and inclusive economic development. For more information, or to contact Garlynn, visit this website. Earlier, Garlynn wrote “A Regional Green New Deal for Portland” at City Observatory.
One thing that has been made abundantly clear during the pandemic of 2020 (and beyond) is the importance of making social payments to help people deal with a difficult and shared transition. During 2020, this transition was due to COVID-19, and involved large portions of the population ceasing to commute or otherwise engage in normal activities outside of the home that involved other people or indoor spaces. There was wide recognition that payments needed to be made to help everyone cope with the expense of the pandemic, as mitigation for a shared national social emergency.
As I write this, Congress is currently debating the right size and number of payments to send, and to whom they should be sent, in order to mitigate for some of the personal impacts of this long and drawn-out national crisis. There is wide recognition that, in this context, it is in everyone’s best interest to make sure all of us have the resources we need to survive; the debate is over the details.
We must now also contend with the transition from a fossil-fuel-dominated economy to a post-carbon economy in order to stave off the worst potential impacts of climate change. Climate change is, in many ways, like a much slower moving pandemic, one where the majority of the body counts still lie years, decades, or centuries in the future, rather than right now (with fears of potential consequences a few weeks from now flowing from any poor decision-making in the present). Yet, we are beginning to see that, even now, the demands for some kind of restitution are being made for those who face potential job or gig losses due to fossil fuel pipelines being canceled under the Biden administration.
These demands are not wrong.
If we are to be successful in enacting a just transition away from a fossil-fuel-powered economy to a carbon-free economy, there will be a steady decline in job opportunities in occupations tied to fossil fuels, such as coal mining, oil drilling, and fossil fuel pipeline building. We must therefore construct a framework to provide climate adjustment aid payments to individuals, to help pay for retraining, retooling, investments, and for equity reasons. I would argue that this should come in the form of a carbon dividend that is paid for by a carbon fee.
For decades, economists have recommended the use of a carbon tax to achieve the necessary GHG emissions reductions we need to prevent the worst impacts of climate change. Yet, within the United States, carbon taxes have not yet been deployed broadly. Most recently, a proposal for a carbon tax was defeated at the ballot box in Washington State, thanks to heavy spending by fossil fuel interests.
To date, however, we have not yet seen a proposal at the ballot box for an equitable carbon tax, which I would argue should instead be called a carbon fee-and-dividend program. This is what we need, however, to power our just transition away from fossil fuels, and to “build back better” the carbon-free economy of the future that we need — without leaving anyone behind.
A carbon fee will necessarily impose additional costs on households and businesses. To ensure that it is not regressive, it must thus be paired with a carbon dividend payment, so that lower-income households are not unfairly burdened by the expense of the fee. That’s a baseline: that the dividend for the average person should cover (or more than cover) their costs of reducing carbon emissions; they could either spend their dividend to lower their emissions and avoid the carbon fee, or if they didn’t have a good way to do that, the dividend would at least cover the costs of the fee of the typical person. We might fund additional benefits, providing higher payments to folks within certain targeted communities, such as those that experience disproportionate burdens from an economic transition away from fossil fuels. These could include both a sort of extended unemployment payments to individuals, as well as a kind of climate loan (perhaps modeled after the Paycheck Protection Program [PPP]) to finance businesses that convert to carbon-free processes.
Here are the elements that such a program should contain, whether enacted by local municipalities, regions, states, or at the national level:
- The carbon fee should be applied upstream, that is, at the level at which fossil fuels or fossil fuel-derived products enter the economy of the taxing jurisdiction, based on the amount of embodied carbon they contain (their carbon emission potential), as well as the amount of carbon used to produce them.
- The price of the carbon fee should be set at a meaningful level to begin with, such as $15 per ton of carbon dioxide equivalent emissions potential (a level proposed by Brookings); not so low as to be completely ineffective, and not so high as to provide a shock to the economy.
- The price of the carbon fee should escalate steadily over time, at a rate that is estimated to deliver the emissions reductions we need to achieve our climate goals. Estimates vary widely on how high the fee would need to go in order to put us on track to keep temperatures from rising above 1.5C by 2030. The IMF estimates it would need to rise to $75 per ton of carbon dioxide equivalent emissions by 2030; other estimates are higher. But once we are on track, the carbon fee (and payments) would flatten out automatically.
- A robust modeling and monitoring program would need to accompany the program, to ensure that the tax rate is set properly to deliver the needed emissions reductions from all sectors of the economy; for instance, if Vehicle Miles Traveled doesn’t decrease by an amount that, combined with the penetration of electric vehicles and blending of renewable fuels, delivers the necessary carbon emissions reductions by a certain year, then the carbon fee should be automatically adjusted upwards to a level estimated (using best available evidence as to the elasticity of demand for fuel containing carbon based on changes to its price) to deliver the necessary emissions reductions by an agency with authority to do so without political interference.
- Some of the revenue from the program should be returned to individual households on a sliding scale, with no revenue returned to households making 200% or more of median income (currently about $140,000 per year), but sufficient revenue returned so that 70% of households making less than 200% of median income will experience no net increase in household expenses due to the carbon fee during the first five years of its roll-out.
- These payments to households should come in the form of a check from the government, delivered monthly or quarterly, so that there is a regular, continuing benefit that can be banked on by regular folks — the same regular folks whose support will be needed to pass an initiative at the ballot box, or support a politician taking a vote in a city hall, county seat, regional council chamber, or state or national capital.
- The remainder of the revenue from the carbon fee should be used to finance the transition away from fossil fuels to a carbon-free economy.
- A public bank should be funded by the carbon fee and empowered to make low-interest loans, using a revolving loan fund, to finance investments that will reduce emissions. This could take the form of a secondary market for loans originated by private lenders; the point is to make the funding available at comparatively low interest rates. These investments could include anything from a household seeking to buy an electric vehicle and install solar/wind power generating facilities and energy storage solutions, to companies seeking to replace fossil fuel consuming processes with renewable processes. Repayment terms should be set to ensure that individuals and companies receiving financing will experience a net benefit, that is, a reduced operating cost level after participating in a bank-funded program in comparison to their previous expenditures for fossil fuel-based energy.
- Certain public investments, such as high speed rail, electric-powered public transit, creating walkable neighborhoods, and similar public infrastructure, should be funded using carbon fee revenue through a grant program to fund the transition away from fossil fuels. We won’t be able to reduce emissions sufficiently to achieve our targets using electric cars and solar panels alone; we also need to transition to compact communities built around walking, rather than driving, in order to reduce the demand for energy to a level we can provide within the limited time available between now and 2035, and 2050. Public investments will need to be made to implement this transition, and the carbon fee can provide the funding.
The beauty of such a carbon fee and dividend program, is that it provides the funding mechanism to households and businesses to pay for a transition away from fossil fuel consumption. If a household currently owns something that requires fossil fuels, such as an internal combustion-powered automobile, then it should be able to obtain financing from the public bank to purchase an electric vehicle, with payments covered by the divided (up to a certain reasonable amount). Then, if at any point a household wants to switch from using the dividend payments to pay for gasoline, to using them to service the car payments for a new electric vehicle, it will have the mechanism to do so without impacting the balance of the household budget. Critically, the carbon dividend payments should be made first, before the carbon fee comes due, to ensure that the most vulnerable members of the community are not harmed by its initial roll-out.
If a business currently owns something that requires fossil fuels, such as a blast furnace to produce steel that is powered by coal coke, then it should be eligible for low-interest financing to replace the fuel source for the blast furnace with electric power or renewable energy.
Such a program won’t be sufficient, by itself, to achieve our total emissions reductions goals by 2050. However, as a part of a larger Green New Deal-esque program that includes investments in urbanism to reduce overall demand for energy in the transportation and building sectors, it could be the critical factor that provides financing to ensure the success of much of the balance of the policy package.
Critically, an equitable dividend as a part of a carbon fee initiative will ensure that a harsher burden is not imposed on households with lower incomes, and thus it will prove to be a progressive, rather than regressive, solution to climate change. One valuable lesson of the Covid-19 pandemic has been that it makes sense, in the face of a dire crisis that threatens everyone, to make payments to help those most affected or who need to adapt for the benefit of all. We should apply that lesson to the climate crisis.