The simple and effective solution to climate change: a carbon dividend

With temperatures in British Columbia reaching a squelching 121F this past week causing over 600 deaths and thousands of hospitalizations, I think it’s important to ask what we can do about this. What piece of legislation would most effectively stop climate change? This is a fundamental question we need to ask in order to avoid catastrophic impacts of sea level rise, extreme weather, deadly heat waves, and spreading infectious disease. Luckily, there is a clear answer: a revenue-neutral extraction fee and dividend program, better known as a carbon tax. I want to lay out 1) what a carbon tax is, 2) how it will put money into the pockets of the poorest Americans, 3) how it will drastically reduce emissions and reduce impacts, and 4) why it’s more politically feasible than a lot of people think.

What is a carbon tax?

At first glance, a carbon tax seems like a regressive tax aimed at increasing the price at the pump to penalize consumers for driving to work. While proposals like this have been suggested, this is polar opposite to what economists recommend. Instead, what an extraction fee and dividend program would do would be to remove subsidies for fossil fuel extraction and instead put in place a fee to oil and gas companies proportional to the carbon dioxide equivalent of their extracted materials. Put simply, it ends the tax payers giving $20 billion per year to some of the richest companies on Earth and instead charges them a fee equal to the social cost of emissions. Climate change has a huge cost on society (the NRDC puts the cost at around $1.9 trillion per year) and a carbon tax would make sure that oil and gas companies would pay their fair share of that burden. Importantly, this is not a tax on individual consumers. Research has shown that taxing just 2300 companies would cover 80 percent of all of US emissions (CRS Report for Congress R42731). This is what’s known as an “upstream” carbon tax and is very similar to how the Clean Air and Water Act works.

Oil and gas companies will do everything in their power to reduce their financial burden. A large part of that cost reduction will go towards shifting financial resources to low emissions energy production. The benefits from fossil fuel subsidies overwhelmingly go towards enriching the pockets of oil and gas executives instead of reducing oil prices with half of government spending going to the richest 20% of Americans. Reversing oil and gas subsidies would end these unfair distributions of wealth and increase the cost of fossil fuel extraction so that at least 50% of current projects would no longer be economically feasible (Erickson, 2017). The increase in cost for oil and gas companies of removing subsidies alone would reduce emissions by around 20%. Economists quantify the cost of energy production using LCOE (Levelized Cost of Electricity) which factors in all life cycle costs from initial factory construction, utilization of subsidies, and fuel costs throughout its lifespan. Currently in the United States, according to the IAE, coal costs around $110/MWh, natural gas costs around $45/MWh, solar costs around $44/MWh, and onshore wind costs around $39/MWh. Yes, you read that right, wind and solar already cost significantly less than fossil fuels. Our current energy grid that’s dominated by fossil fuels is merely a legacy of the fact that wind and solar costs have dropped exponentially in the last few decades. With a removal of oil and gas subsidies and an extraction fee, experts estimates the cost of electricity from natural gas will be 43–500% higher than wind and solar by 2030 (NREL, 2017; RethinkX, 2021). That price difference will incentivize companies diversifying their energy portfolio with more clean energy.

How will it help the poorest Americans?

Now you may be saying, “It’s great that we’re taxing the fossil fuel companies responsible for climate change but those companies will just pass down those costs to consumers and small businesses.” This is absolutely true. Whatever costs that fossil fuel companies can’t reduce by shifting towards cheaper energy production methods will be passed down to consumers. This is somewhat by design to disincentivize consumers from using as much oil and gas but this cost burden hits rich consumers just as much as poor ones. Studies from the National Bureau of Economic Research has shown that poor people pay a somewhat similar percentage of their income on electricity compared to rich people. On average, the poorest 20% of Americans pay 0.55% of their income on energy while the richest 20% pay 0.48% of their income on energy. Despite these similarities, a carbon tax without a dividend would still be regressive. Estimates suggest that a carbon tax would increase gas prices at the pump by between $0.11/gallon (based on the IPCC’s recommended pricing of $25+0.5%/ton-year) and $0.36/gallon (based on $40/ton, Marron, Toder, and Austin 2015). This is why a revenue-neutral dividend is so important. To make the program truly a progressive tax, 100% of the over $2 trillion in earnings from the carbon tax would be sent out as monthly checks to Americans. As a result, two-thirds of Americans would receive more money from the carbon tax than their increased costs at the pump. An average family of four would receive $396/month by 2035 (REMI, 2013). The poorest 20% of Americans would see in increase in their income of nearly 7% (Tax Foundation, 2019). The influx of money into the economy would create an estimated 2.6 million new job and save 230,000 lives from carbon reductions (REMI, 2013). This is why countries like Sweden which have some of the highest carbon prices in the world, have seen a growth in GDP directly correlated to the implementation of their carbon tax (Government Offices of Sweden, 2017). The US would likely receive a $80 billion increase in GDP just 5 years after implementing the program and electricity costs would start to decrease just 10 years after implementing the program at which point coal would likely be entirely phased out of production (REMI, 2013).

Would it reduce emissions?

A carbon extraction fee and dividend program would be hugely impactful for reducing emissions. Research shows that implementing an extraction fee and dividend would lower emissions to 52% of 1990 levels in just 20 years (REMI, 2013). According to the IMF, a $35/ton carbon tax would be enough to reduce US emissions to our Paris Climate Agreement commitments. An extraction fee would be relatively cheap to administer, more effective, and less prone to fraud than a Cap and Trade program (IMF, 2019). A carbon tax is not a silver bullet and additional programs like funding carbon capture research and funding wind and solar subsidies would be important for the US to reach net zero emissions. The immediacy and effectiveness of an extraction fee for halving carbon emissions with no cost to taxpayers however means that it is crucial for addressing this issue.

Is it politically feasible?

A revenue-neutral carbon tax and dividend program has a surprising amount of support in the US. A Stanford University Resources for the Future poll showed that 67% of Americans support a revenue-neutral carbon tax. The Yale Program on Climate Change Communication found that 68% of Americans would support a revenue-neutral tax with 52% saying that it should be a high priority for Congress. That includes 48% of registered republicans who support such a policy. Polls from NSEE and Gallop also suggest that republicans are just about 50/50 split on a revenue neutral carbon tax with support among democrats breaching 70%. Over half of republicans are also in favor of a carbon tax with revenue going to research and development in renewable energy technology. This support from voters is also permeating into Congress. 43 republicans in the House of Representatives support a revenue-neutral carbon tax. Recent interviews and policy meetings also suggest that republican Senators Lisa Murkowski, Mike Braun, Mitt Romney, and Susan Collins would all potentially support a revenue-neutral carbon tax (E&E News, 2021).

We need to act on climate change and we need to do it now. An extraction fee and dividend is the most effective and politically feasible option available to incentivize massive emissions reductions. We can put money in the pockets of the most vulnerable Americans and take strides to solve climate change all with a stroke of a pen. This is the action that matters. This is the action that can end the acceleration of heat waves and hurricanes bombarding this country while making oil and gas executives pay for the harm they’re causing.