Decoding the “Price on Carbon” Jargon – Part II

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In today’s New York Times, Coral Davenport reports, “More than two dozen of the nation’s biggest corporations, including the five major oil companies, are planning their future growth on the expectation that the government will force them to pay a price for carbon pollution as a way to control global warming.”

That’s great news.  And it is why it is more important than ever that we consider the different ways we can achieve this critical goal.  In my prior post, I reviewed what it means to “put a price on carbon” by instituting a carbon tax or capping carbon emissions.  Now, let’s dig a little deeper and consider how we might use the revenue generated from either a carbon tax or carbon cap – and some of the additional jargon that accompanies the different policy options available to us.

Dividends and Rebates

A carbon tax or carbon cap program will result in revenues for the government, either from the direct application of a tax or from the sale of emissions permits.  These revenues present us with decisions to make – and more policy labels to use and abuse.

One option is for the government to simply adopt a carbon tax or a carbon cap without determining any explicit use for the resulting revenues.  The funds would be deposited, with other tax revenues, into the Treasury’s general funds to finance government expenditures.  Given the size of the federal budget deficit, the idea is not illogical.

Another approach is to use carbon tax or carbon cap revenues to offset other taxes.  This could be achieved in any number of ways; reducing the payroll tax is a popular proposal.  If the amount of taxes cut is equal to the new revenue, the policy is considered revenue neutral.  Hence, proposals to establish a carbon tax but make an equal amount of cuts in other taxes is sometimes referred to as a “revenue neutral carbon tax swap.”

Still other proposals call for distributing the revenues collected from a carbon tax or carbon cap program to every American in equal shares (except that children would receive a partial share).  The payment is referred to as a “dividend” or a “rebate.”

Thus, a carbon tax with a dividend mechanism may be called a “tax-and-dividend,” “tax-and-rebate,” “fee-and-dividend,” or “fee-and-rebate”  — four slightly different policy terms that all get batted around but all mean the same thing.  “Tax-and-dividend” is probably the clearest and most popular of the four competing labels.  “Fee-and-rebate” (sometimes shortened to “feebate”) is probably the worst term in this context because that same label is applied (more appropriately) to policies aimed at consumer purchases.  For example, some propose that people buying cars that get below average mileage be charged a “fee” while those buying cars that get above average mileage be given a “rebate.”  The fees would fund the rebates.  (Such a scheme has its merits but has obvious inefficiencies compared to a carbon tax or cap.)

Proposals that combine carbon caps with a dividend payment are best known by the “cap-and-dividend” label.  Cap-and-dividend proposals are a subset of cap-and-trade proposals.

Of course, just as the terms “cap,” “tax,” and “fee” are used somewhat flexibly, so too are the terms “dividend” and “rebate.”  This fact, of course, adds to the confusion around the policies.  I recently heard a state energy commissioner excited to use the carbon “dividend” to subsidize renewable energy projects.  By “dividend,” he just meant government revenues generated by a carbon tax.  Thus, while I hope walking through the terminology has been useful, be aware that very different policies sometimes carry the same label.

Pure Cap-and-Dividend

I’ve labeled the specific cap-and-dividend policy I advocate as “Pure Cap-and-Dividend” to cut through the noise and avoid confusion with other proposals.  Under Pure Cap-and-Dividend:

  • 100% of carbon emissions permits will be auctioned to the highest bidder; none will be given away.
  • Prices on emissions permits will have no floor or ceiling and there will be no “alternative compliance payment” option available.  If an emitter fails to surrender all necessary permits, it will pay a penalty significantly higher than the market price for the missing permits.  (To ensure that the caps are not exceeded, the government will then reduce the number of permits available in the next auction by the number that the emitter failed to surrender.)
  • 100% of revenues collected from the sale of emissions permits will be distributed, in equal shares to citizens (except that payments with respect to children will be smaller).

You can read more about Pure Cap-and-Dividend here.  Upcoming posts will return to explaining why Pure Cap-and-Dividend is the best way to address the climate crisis.