Climate change is an all-hands-on-deck crisis. The problem comes from many quarters of Spaceship Earth, and while many solutions can help solve it, none of them can do it alone. Vegan diets and paper straws alone won’t save the planet. We need high-impact, large-scale policy change to redirect our economy away from fossil fuels, synergize with other solutions, and catalyze the transition to a clean energy economy.
Economists, leading voices in the business community, and many others believe that the most promising single policy solution is a price on carbon. The carbon pricing mechanism most talked about is a carbon tax. Unfortunately, there’s a roadblock: the word “tax.” Almost without fail, knee-jerk objections arise: “it won’t work,” “Republicans and businesses will fight against it tooth and nail,” “it will kill small businesses,” and “it won’t help my community.” But what if a carbon tax created jobs, grew the economy, and its revenues were used to send a monthly check to U.S. households? There is a specific piece of carbon tax legislation— the Energy Innovation and Carbon Dividend Act (EICDA)— that would do all these things.
EICDA: The Biggest Climate Bill You Never Heard Of
Carbon taxes are considered the most effective economy-wide policy tool for greenhouse gas emission reductions. The theory is simple: Emissions are causing great damage, and those who are responsible should pay for the consequences.
By requiring CO2 emitters to pay for the negative consequences of their emissions, carbon taxes correct the market’s failure to include those costs in the price of the fossil fuels that are at fault. In a January 2019 statement 1 in the Wall Street Journal, more than 3,500 U.S. economists from across the political spectrum declared: “A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.”
The Energy Innovation and Carbon Dividend Act (H.R. 2307) combines a carbon tax with a carbon dividend. Like wine and cheese, it’s a good pairing and has generated substantial buzz in the climate policy world. When it was introduced in 2018, it was the first bicameral, bipartisan carbon tax ever introduced in Congress. If enacted it would be the first U.S. law to address climate change using a comprehensive, market-based, revenue-neutral approach. With 69 co-sponsors as of this writing, it is the best-known and most broadly supported carbon legislation in the current session of Congress.
The EICDA has three pillars:
- A gradually rising carbon fee
- A carbon dividend or rebate to households
- A border carbon adjustment
Gradually Rising Carbon Fees Reduce Emissions
EICDA’s carbon fee is a straightforward tweak to market dynamics. The bill imposes a steadily rising carbon fee on the CO2 emissions of fossil fuels and carbon-intensive products when they enter the economy — at the mine, well, or port of entry. To avoid shocking the economy, the fee starts at a low $15 per metric ton of CO2 emissions. The fee then increases annually by $10 per metric ton to gradually wean the economy away from fossil fuels. This approach gives businesses certainty in making both short- and long-term investment decisions.
The fee will shift market dynamics in favor of fossil fuel alternatives. The rising price of CO2 emissions will encourage innovation and make climate solutions more competitive in the marketplace. Everyone— individuals, businesses, and government— can make choices that work economically AND drive down carbon pollution.
The robustly increasing fee makes it possible for EICDA to commit to an ambitious schedule of U.S. emission reductions and project a decrease in emissions to 36-38% of 2005 levels by 2030. This exceeds America’s commitment under the Paris Agreement to a 26-28% reduction in emissions by 2025. EICDA will reduce America’s carbon pollution by 50% by 2030, putting us on track to reach net zero by 2050.
Carbon Dividends Avoid Regressivity and Stimulate the Economy
Revenues from the EICDA carbon fee are projected to total over $1 trillion in the first eight years. EICDA pays over 98% of those revenues as a monthly dividend (think rebate) to households. In year one, a family of two adults and two children would receive about $790 in carbon dividends. As early as year ten, that sum would increase to nearly $3,500. Roughly two-thirds of households will break even or come out ahead financially. On top of being equitable, the carbon dividend makes good political sense. First, it prevents the possibility of an American Yellow Vest rebellion, like the one that greeted France’s attempt to raise gas taxes. Second, once voters start receiving monthly dividend checks, woe to the politician who tries to take them away!
The money that EICDA puts in the pockets of consumers will flow to businesses that serve them, creating significant GDP growth and 2.1 million new jobs in all sectors of the economy that do not depend heavily on fossil fuels. 2,3 And finally, the carbon dividend keeps EICDA revenue-neutral. EICDA’s administrative costs are estimated to average 1.7% of carbon fees collected over 30 years. Since the rest of the revenue is returned to Americans as a carbon dividend, the size of the government doesn’t grow and no new programs are created. Because net federal revenue doesn’t increase, it’s more accurate to describe carbon fee and dividend as a “tax shift” rather than a tax increase.
A Border Carbon Adjustment Harmonizes Global Trade
To ensure that U.S. manufacturers compete on a level playing field with countries that have a lower price on carbon, imported carbon-intensive goods will be assessed for a border carbon adjustment. Meanwhile, American exporters of those same goods will receive a refund. The adjustment on imports has the effect of encouraging other countries to enact their own price on carbon because the U.S. gets to keep the adjustment fees. If those countries enact a comparable carbon price, they would keep the fees instead.
About Those Objections…
As we race to reverse climate change and avert the worst consequences, policy discussions are attended by urgency and the question, “Will it be enough?” With President Biden’s, all-government approach to addressing the crisis 4,5, many steps are being proposed and taken. Even in aggregate, however, the answer is, “No! They all contribute, but they are not sufficient.” It’s not possible to estimate those reductions, but we do know that without EICDA, the U.S. cannot meet the net zero by 2050 emissions challenge!
Will it work?
Economists think so. In 2019, 3,576 of them— including 28 Nobel Laureate Economists, 4 former Chairs of the Federal Reserve, and 15 former Chairs of the Council of Economic Advisers— announced support for carbon fee and dividend. 6 But what does the real world tell us? To find out, let’s look at encouraging outcomes from carbon taxes in Australia, British Columbia, and Sweden.
Australia’s neck-jerking flip-flop on carbon taxes proves the point. Under a liberal government, a carbon tax was initiated in 2012. In 2014, a new conservative government rescinded the tax. From 2012-2014, greenhouse gas emissions declined even while global emissions rose. After the carbon tax was revoked, Australian emissions quickly rose to new highs. The rapidity of the turnaround, both after implementation and then after the tax was revoked shows the rapid impact of a carbon tax on emissions. The following chart shows emissions before, during, and after the carbon tax was implemented. 7
In 2008, the Canadian province of British Columbia introduced North America’s first revenue-neutral carbon tax. It imposed a gradually increasing price on the use of carbon-based fuels and covered approximately 70% of provincial emissions. Initially, all the revenues funded corresponding cuts in other taxes, and every dollar generated was returned to British Columbians. 8,9 Even though B.C.’s tax started quite low, it reduced emissions in the province by up to 15% from what they would have otherwise been. 10 From 2008-2013, BC’s drop in emissions was 350% larger than the rest of Canada.
At the same time, the tax had negligible effects on overall economic performance; between 2007 and 2014, B.C’s. real GDP grew 12.4%. Stewart Elgie, Professor of Law and Economics at the University of Ottawa said, “Well-designed carbon pricing can be good for the environment and the economy. In the 11 years since B.C. brought in its carbon tax, it’s outpaced the rest of Canada both on emission reductions and GDP growth. 11”
Implemented in 1991, Sweden’s carbon tax covers only about 40 percent of all greenhouse gases emitted nationally. Sweden levies the highest carbon tax rate in the world, at $126 per metric ton of CO2 in 2020. As a result, Sweden’s emissions have fallen by 27% since 1991, while GDP per capita increased by more than 50% (1990 – 2019).
Do Republicans Hate It?
That depends on who you ask. A notable group — including James A. Baker 12, Henry Paulson 13, George P. Shultz 14, Marty Feldstein 15, Greg Mankiw 16 and Bob Inglis 17— have championed carbon taxes for years. While this pedigree may not matter to some Republicans, it is important to remember that a carbon tax is in line with conservative principles. In 2017 a group of traditional Republicans released a proposal for a Carbon Dividend plan containing all three pillars of the EICDA 18. The proposal has the support of a diverse group of major corporations, including Exxon, AT&T, Pepsi, Microsoft, and Ford. Their support refutes the myth that a carbon tax will be bad for business.
Is It True that Big Businesses Hate Carbon Pricing?
Au contraire! A growing consensus within the business community believes that pricing carbon is the single necessary (but not the only) policy for addressing climate change. Elon Musk, for example, frequently calls for a carbon tax and frames it more or less like this: “all these other things— regulations, clean energy standards, etc., are just playing around the fringes. Just have a carbon tax and the market will do the right thing.”
Musk is not alone. In the last year, a chorus of business voices has prioritized and called for emission reduction solutions that are ‘market-based’ and/or ‘economy-wide’ or simply for pricing carbon. Here’s a sampling of their voices:
“A world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system … A price on carbon is the single most important step to manage climate risk 19”
“The [U.S.] Chamber supports a market-based approach to accelerate GHG [greenhouse gas] emissions reductions across the U.S. economy… Inaction is not an option 20.”
“No issue ranks higher than climate change… We support implementation of carbon pricing… Carbon prices… minimize the costs of reducing emissions 21”
“… a market-based… approach… must include placing a price on carbon 22”
“…public policy must…Utilize economy-wide market forces to deliver outcomes at the least cost 23”
A Carbon Price Won’t Kill Small Business
As of this writing, some 1,200 mostly small- or medium-sized businesses have endorsed the EICDA. These voices come from sectors all over the economy, including wineries, breweries, ski resorts, health care, bicycle manufacturers, renewable power providers, electric vehicle makers, fashion, real estate, and high tech. They know that a carbon price will be fair to them and those that are proactive will come out ahead.
What About Our Communities?
Along with such grassroots business support comes an important concern: How will a carbon price affect our communities? EICDA’s wine and cheese pairing delivers big benefits to Americans everywhere. In particular, fenceline populations— those near factories, refineries, and powerplants— and low-income communities will benefit the most in terms of environmental justice and income inequality.
First, a carbon price will save 4.5 million American lives over the next 50 years by helping restore clean air across the country. This will have particular impact on fenceline communities, which have suffered the worst health impacts of burning fossil fuels. In these places, air quality will improve the fastest and the most. 24
Second, the EICDA dividend is progressive. Almost two-thirds of American households will come out ahead because they will receive more in dividends than they will pay in fee-related price increases. 25 This progressivity happens for two reasons. First, dividend income will be a much larger percentage of a low-income household’s budget than a middle or high-income household. Second, because low-income families consume less, they have smaller carbon footprints and will face smaller price increases due to the carbon fee. In this way, the dividend addresses income inequality.
It’s not too good to be true!
What more could anyone ask for? Fee and dividend is the single, must-have policy for achieving net zero emissions by 2050. It grows the economy, creates millions of jobs, improves public health especially in fenceline communities, reduces income inequality, and will incentivize our trading partners to adopt their own price on carbon. With all these co-benefits, even if climate change is truly a Chinese Hoax 26, we should enact the EICDA anyway!
Thank you to Harold Hedelman for additional research and reporting in this article. I’m the founder of SynBioBeta, and some of the companies that I write about are sponsors of the SynBioBeta conference and weekly digest.
1: Including 28 Nobel Laureate Economists, 4 Former Chairs of the Federal Reserve, and 15 Former Chairs of the Council of Economic Advisers. https://www.econstatement.org/
12: James A. Baker was White House Chief of Staff and Secretary of the Treasury under President Ronald Reagan, and Secretary of State and White House Chief of Staff under President George H. W. Bush
13: Henry M. Paulson, Jr. served as Secretary of the Treasury under President George W. Bush.
14: George P. Shultz served in various positions under three different Republican presidents (Eisenhower, Nixon, and Bush), including four different Cabinet-level posts.
15: Marty Feldstein served as Chairman of the Council of Economic Advisers and as Chief Economic Advisor to President Ronald Reagan
16: Greg Mankiw was Chairman of the Council of Economic Advisers under President George W. Bush. In 2006, he became an economic adviser to Mitt Romney, and worked with Romney during his presidential campaigns in 2008 and 2012. In October 2019, he announced he was no longer a Republican due to his critiques of President Trump and the Republican Party.
17: Bob Inglis represented South Carolina’s 4th congressional district from 1993-99 and again from 2005-11.