What is a carbon fee and dividend policy?
A carbon fee and dividend policy is an evidence-backed solution to address the climate crisis by encouraging polluters to reduce their greenhouse gas emissions. The plan puts a price on carbon pollution by charging a fee on carbon-based fuels, imposed as it comes out of the ground or when it is imported, and distributes the revenue directly to people through a dividend cheque.
The plan rewards people for reducing their carbon footprint. Most households--particularly those with modest to low incomes who generally consume less--will gain a net financial benefit from a carbon fee and dividend policy.
A carbon fee and dividend is supported by the Citizens’ Climate Lobby as the simplest, most effective and fairest policy to price carbon pollution and reduce greenhouse gas emissions.
Why is a carbon fee and dividend effective?
A carbon fee and dividend simultaneously makes it easier for the average household to afford investments in reducing fossil fuel use by providing a regular carbon cheque, and it encourages heavy polluters to reduce their emissions to avoid paying a carbon fee.
A carbon fee and dividend is a simple market-based solution that reduces carbon pollution by internalizing the costs of using carbon-based fuels, while stimulating investment in the clean economy and in low carbon job creation.
Administration of a carbon fee and dividend policy is similar to British Columbia’s carbon tax. Since the implementation of a modest price on carbon pollution, BC has reduced fossil fuel consumption by 16%, while it’s economy has performed better than the Canadian average.
How is a carbon fee and dividend different from a carbon tax?
A carbon tax puts a set price on carbon pollution and uses the revenue to fund government services and/or provide tax reductions. For example, the BC carbon tax is revenue neutral since the government has used the revenue to reduce personal income and business taxes. As a result, BC has the lowest personal income tax rates in Canada and one the lowest corporate tax rates in North America.
A carbon fee and dividend puts a set price on carbon pollution and places the revenue in a dedicated account that is returned directly to households in the form of a carbon dividend cheque. A carbon fee and dividend does not affect other government programs or taxes.
How is a carbon fee and dividend different from a cap and trade system?
A cap and trade system puts a price on carbon pollution by placing a limit on total emissions and has the carbon price set by auctioning and trading pollution permits. The carbon price fluctuates over time based on the demand from the trading of pollution permits. In theory, the trading of permits helps ensure that emission reductions occur at the lowest cost.
A carbon fee and dividend provides greater price certainty for businesses and households, while cap and trade provides greater certainty in emission reductions. A cap and trade system is generally more complex, bureaucratic and difficult to administer than a fee and dividend or carbon tax policy.
Why does the GPO support carbon fee and dividend over cap and trade?
The GPO supports any policy that puts a price on carbon pollution. However, we believe a carbon fee and dividend is the most effective and fair solution.
A revenue neutral carbon fee and dividend is a progressive carbon levy. It rewards carbon-conscious consumers and protects people living on lower incomes as we transition away from a high carbon economy. It is the most politically workable carbon pricing mechanism.
The advantages of a carbon fee and dividend policy are:
- It’s effective: Putting a set price on carbon pollution is a simple way to create market incentives to reduce GHG emissions. A set price has reduced BC’s fossil fuel use by 16%, while encouraging economic growth and job creation in the clean economy. The EU cap and trade system has experienced mixed results.
- It’s transparent: Money collected from a carbon fee is distributed directly to households as a carbon dividend cheque. Money transfers are less transparent with the trading of pollution permits and carbon offsets.
- It’s simple: The more carbon you use, the more fee you pay; the less carbon you consume, the more financial benefits you receive. Cap and trade requires complex pollution permit auctions and trading systems.
- It’s predictable: A set price on carbon pollution with scheduled price increases provides businesses and consumers with a stable and predictable price for planning and purchasing decisions. Fluctuating prices in a cap and trade system make it difficult for businesses and people to plan.
- It’s easy and less expensive to administer: Existing structures are in place to collect the fee and return the dividend to the people of Ontario. A cap and trade policy will require new systems, negotiations with other jurisdictions and more bureaucrats to administer. We can’t afford to delay action on the climate crisis.
- It fair: Estimates are that ⅔ of households--usually middle and lower income households who consume less--would break even or receive more money in dividends than they would pay in fees. In either system, consumers ultimately pay for carbon pollution in the cost of carbon fuels and goods produced with carbon. A dividend helps people manage costs and purchase energy saving products and services.
- It rewards people: The dividend cheque provides people with money to reduce their carbon footprint by purchasing low carbon and energy saving products and services. A cap and trade system rewards traders, lawyers and accountants who are needed to run the auction and trading systems.
- It has a reinforcing support mechanism: The higher the carbon fee, the higher the carbon cheque. As people shift to low carbon and energy efficient goods and services, they will want a higher, more effective carbon fee, because they will receive more money in their pocket.
Who pays the carbon fee and who receives the carbon dividend?
A carbon fee will be charged at source when fossil fuels are taken out of the ground or imported into the province. This reduces administrative costs because a relatively small number of companies pay the fee.
These companies will likely pass costs on to other companies who use fossil fuels and ultimately to consumers. High carbon goods will cost more, low carbon goods will cost less.
Revenue will be placed in a dedicated account and returned to the residents of Ontario.
How will a carbon fee and dividend affect you?
The Citizens’ Climate Lobby has provided the following simple example to show how the system will work in a way that is socially fair.
Assuming a fee on carbon would increase prices of goods by 1%, the table below illustrates the effect on four adults with different consumption patterns.
Purchase of goods with carbon
Carbon fee on goods (assumes 1%)
Dividend paid to adult ($3,200 / 4)
Difference between fee paid and dividend received
After the carbon fee and dividend is implemented:
Adult A and B (which studies show represent 66% lower and middle income adults) who purchased fewer goods and generated less carbon emissions will receive a dividend that is more than they paid in increased costs.
Adult C and D (which studies show represent the highest 33% of income earners) who purchased more goods that emitted carbon will receive a dividend that is less than what they paid in increased costs.
How much will a carbon fee cost?
Let’s look at gasoline, the simplest example.
A $10 per tonne price on carbon pollution will increase gas prices by 2.4 cents per litre--often less than the daily fluctuation in the price of gas--according to data from BC. BC’s carbon tax is currently $30 per tonne, which increases gas prices by 7.23 cents per litre. Costs in Ontario will likely be the same.
Why not use the dividend to re-invest in the clean tech sector?
A carbon fee will create market incentives for investments in clean technologies. A carbon dividend will help people, especially low and middle income households, have the money to purchase low carbon and energy saving goods and services without the government picking winners and losers.
We need immediate action to reduce carbon pollution in order to reduce the worst effects of climate change and reduce the costs of climate action. The GPO does not want carbon pricing to be delayed due to concerns that the fee is a “tax grab” or that the “government can’t be trusted with spending the revenue.” Nor does the GPO want delays in carbon pricing while carbon trading systems are being designed and negotiated.
Quick, simple, transparent solutions are needed for immediate implementation of carbon pricing.