The threat of climate change, driven by excessive emissions of greenhouse gases, is one of the most pressing issues facing the globe today. As a developed nation with a strong influence in the global economy, the United States urgently needs to protect current and future generations by establishing itself as a role model and leader in the fight on climate change. The United States’ past regulatory approaches to limit emissions have been largely unsuccessful. Creating effective standards to cover all polluting processes is incredibly challenging given the vast number of processes responsible for greenhouse gas emissions today. Enforcing such complex standards is a time- and resource-intensive process; the alternative option, a market-based mechanism, avoids these regulatory enforcement costs by instead defining a price for pollution in the market – a price that polluters actually have to pay. In pricing carbon emissions, we define the problem, which is the cost of emissions to society and the environment, by making it costly to pollute. Instead of broad emissions reductions standards, we need an intervention in the market to put a price on emissions – one which, for political feasibility’s sake, can appeal to both parties.
In the House of Representatives today is just that — an innovative and bipartisan bill to mitigate excessive pollution and protect our economy and environment: The Energy Innovation and Carbon Dividend Act of 2019.[1] This purpose of this bipartisan sponsored bill is to “create a Carbon Dividend Trust Fund… to encourage market-driven innovation of clean energy technologies,”[2] and it is summarized in its four components below.
- Carbon Fee: The policy implements a carbon fee on fossil fuels that gradually increases over time as emissions reductions goals become more aggressive.
- Carbon Dividend: The money from this fee is collected and distributed as a proportional monthly dividend to all eligible United States citizens.
- Border Carbon Adjustment: In order to protect American jobs and industries, there will be a border carbon adjustment cost paid for imported goods; accordingly, exported goods will receive a refund.
- Regulatory Adjustment: Upon enactment, this policy suspends the EPA’s authority to regulate carbon and equivalent emissions for 10 years (at which point the policy’s success will be evaluated, and the EPA’s jurisdiction may be restored).
The carbon fee component, through reducing emissions, is our climate change solution. The carbon dividend, on the other hand, is our political solution. The projected effects and implications of the carbon dividend system are what make this bill a politically feasible solution to climate change.
The Carbon Fee – Correcting A Failure of Our Markets
The root of our excessive GHG emissions can be well understood through an economic lens as an externality of polluting processes. Simply put, an externality is a cost or benefit received by a third party that did not choose to receive that cost or benefit.[3] In a negative externality, this third party is not involved in the transaction but unwillingly pays a cost resulting from it.
For processes that release greenhouse gases, such as burning fossil fuels for energy, our negative externality is the cost of pollution to society, which polluters do not pay. In other words, clean air has value to society and the environment, yet polluters are still allowed to “use” up this clean air for free. This negative externality results in overproduction (and thus unsustainable emissions quantities) because polluters get to operate at a reduced cost by not having to pay for their emissions. But what if, you might ask, polluters did have to pay for emissions?
A carbon fee offers the most efficient and cost-effective solution for mitigating greenhouse gas emissions because it assigns a cost to the root of our pollution problem. The fee is a price paid, per ton of emissions, by polluters. At the basest level, when this price for emissions is established and enforced, polluting processes immediately become more expensive. This incentivizes innovation (of non-polluting alternatives) because investors will increasingly invest in processes that don’t have to pay the cost of GHG emissions. And as pollution becomes increasingly expensive, alternative, “clean” technologies become increasingly attractive.
Such a carbon fee provides a solution that is both simple and “active.” It applies broadly to all transactions and provides “continuous inducements… to encourage polluting entities to reduce” harmful emissions.[4] With a market-based mechanism, there’s no wait; emissions decline immediately as polluters adjust to their altered cost structures. And these polluters adjust because they do not want to pollute, they want to profit. As long as using up clean air is free, they’ll continue to do so – and they will only adjust once their income statement says to.
The Carbon Dividend: From Theory to Political Feasibility Through Bipartisan Benefits
The key in making a market-based mechanism politically feasible (particularly in the eyes of the Republican Senate and current administration) is ensuring that it is efficient, effective, and that it offers bipartisan benefits. A simple carbon tax would likely see very strong resistance in Congress. From a more Libertarian or Republican perspective, handing money to the government at the immediate cost of economic output isn’t much of a compelling benefit. But under the Energy Innovation and Carbon Dividend Act, the carbon is distributed as a dividend to citizens of the U.S., putting cash in the pocket of Americans every month (and as such, creating an array of benefits which can appeal to Democrats and Republicans alike).
This policy is projected to create 2.1 million jobs due to economic growth in local communities, and in its first 12 years it’s projected to reduce America’s emissions by at least 40%.[5] Critically, the money collected from the fee is not another source of government revenue. These dividends would be money in the pocket of American people. And though energy prices are expected to rise with a transition to renewable energy infrastructures, the carbon dividend paid to citizens is projected to be comparable to the increase in energy expenditure for the average citizen; importantly, since lower-income households generally consume fewer carbon-intensive goods and services, this money will have the greatest relative effect for people and communities that need it most.[6] In addition, the border carbon adjustment component helps to protect American industries by imposing an additional cost on imported goods and a refund for exported goods; by imposing a cost on producers that live in other countries, this border carbon adjustment would help alleviate the pressure U.S. producers might face due to relatively cheaper imported goods (coming from countries that do not enforce a carbon tax).[7]
This Energy Innovation and Carbon Dividend Act will slash America’s GHG emissions, correct our market inefficiencies, and protect vulnerable communities from rising energy prices during the transition to renewable energy infrastructure. This bipartisan sponsored bill provides an opportunity for a market-based solution to climate change that we cannot afford to pass up.
[1] H.R. 763 – Energy Innovation and Carbon Dividend Act of 2019, 116th Congress, https://www.congress.gov/bill/116th-congress/house-bill/763/text
[2]Ibid.
[3] Buchanan, James; Wm. Craig Stubblebine (November 1962). “Externality”. Economica. 29 (116): 371–84. doi:10.2307/2551386. JSTOR 2551386.
[4] Environmental Protection Agency, Economic Incentives, https://www.epa.gov/environmental-economics/economic-incentives#main-content
[5] Citizens’ Climate Lobby, Energy Innovation and Carbon Dividend Act, https://citizensclimatelobby.org/energy-innovation-and-carbon-dividend-act/
[6] Noah Kaufman et al. (October 2019). An Assessment of the Enegy Innovation and Carbon Dividend Act, https://energypolicy.columbia.edu/research/report/assessment-energy-innovation-and-carbon-dividend-act
[7]Stefan Koester, Gilbert Metcalf (April 11, 2017) Carbon Taxes and U.S. Manufacturing Competitiveness Concerns https://econofact.org/carbon-taxes-and-u-s-manufacturing-competitiveness-concerns
I am on the whole supportive of this bill. I think it’s a practical solution to reduce greenhouse gas emissions that could potentially appeal to members of both parties. I also agree that this will alleviate some of the equity issues associated with pollution, especially when we consider the context of environmental justice. However, I have some concerns about the Border Carbon Adjustment component. Imposing a carbon tax on imported goods is akin to imposing tariffs. In many cases, unilateral increases in tariffs have contributed to retaliatory tariffs and even trade wars, as seen in the ongoing US-China trade war. In the US-China trade war, the US suffered economically and did not appear to emerge with significant concessions from China. The Border Carbon Adjustment component might see similar results. The price of US exports will likely go up due to the carbon tax, and on top of that, tit-for-tat tariffs will make them even more expensive, leading to a decrease in export volume. Even with a tax refund, it might not be sufficient to make up for a loss in export volume. One solution would be for the federal government to provide additional subsidies for exports, but the cost feasibility is another concern. Another solution is to engage in more diplomacy with major trading partners and try to reach a consensus on carbon emissions tax. Perhaps that will give the US another opportunity to shine and re-establish itself as the leader in climate change.
I think you make several good points about H.R. 763. The policy is fundamentally sound, carbon taxes reduce rapidly and substantially reduce emissions. The dividend provision is novel and progressive, the majority of households and is a small scale UBI in some ways. That being said, I do not think that this bill is politically feasible. Currently, the bill has one Republican cosponsor, Francis Rooney, who will not be running for reelection in 2020. Past carbon fee and dividend bills have had some Republican cosponsors, in fact the first carbon fee and dividend bill (to my knowledge), The Raise Wages, Cut Carbon Act of 2009 was introduced by Republican Bob Inglis in the 111th congress. South Carolina voters the replaced him with Trey Gowdy in the next election. Republican Jeff Flake sponsored a Carbon fee and dividend bill, but only a few weeks before he left office. The Republican who will try to be active in Congress in 2021 who has cosponsored a carbon fee and dividend bill, to my knowledge, is Pennsylvania’s Brian Fitzpatrick. Fitzpatrick has declined to cosponsor H.R. 763 in the current Congress. No republican can endorse climate positive legislation and remain a viable candidate.
This bill has been heavily promoted by the Citizen’s Climate Lobby, an organization that claims 60,000 active members and established the bipartisan Climate Solutions Caucus, has only been able to get one of the 30 CSC Republican members to cosponsor this bill. The CCL has branded itself as “the far middle” but the fact is that addressing climate change is a partisan issue. When I interned with my Congressman in D.C. I sat in on a meeting with the Representative and the CCL. Afterwards I talked with our energy and environment staffer who said the only way this bill is politically feasible is if democrats offered to abolish the EPA. For his part, the Representative wanted the dividend to be distributed progressively, not as an equal amount to everyone. H.R. 763 is in a political middle ground where, although it is reasonable, addressing the climate is so anathematic to the Republican agenda that no bill will pass without massive concessions elsewhere. Thus, climate legislation will only pass with democratic control of the Congress. In that scenario, the “bipartisan” elements of a climate bill would be stripped out. That climate bill would probably resemble the green new deal more than a carbon fee and dividend system. Fee and dividend in any form is too radical for Republicans and not radical enough for Democrats. It is a shame, fee and dividend is an innovative and elegant solution to Armageddon that will be sacrificed on the altar of Republican partisanship.
In response to the previous comment, I don’t think a border adjustment would provoke a trade war. U.S. products do not get an advantage under this scheme, the border adjustment merely ensures imported goods still have same price relative to American goods as they had pre-tax.