As climate change becomes an increasingly prominent part of politics, it is painfully clear that the United States lacks an effective carbon price. An emissions trading scheme operates in California with a floor of $17.71 per ton, but failed at the national level during President Obama’s first term. In 2019, members of Congress introduced a new approach to carbon pricing: The Energy Innovation and Carbon Dividend Act (EICDA). The bill establishes a tax on carbon dioxide of $10 per ton and would increase that price annually by $10 per ton. A 2019 analysis at Columbia University projected that the tax on its own could reduce emissions between 36-38 percent by 2030.
Carbon taxes have declined in political popularity in recent years—including on the left. The tax is seen as a deviation from the massive public investment and industrial policy needed to move the economy. As demonstrated by the fight over I-732 in Washington State, there are difficult political concerns over equitably disbursing revenue and offsetting cash flow impacts on low-income families. The gilet jaunes protests over French President Emmanuel Macron’s gas tax increases highlight the pitfalls of “sin” taxes, especially ones that expect voters to bear price hikes on common staples without compensation.
EICDA bypasses much of this debate by simply sending all collected revenue back to individuals. There is promise to this fee-and-dividend approach. Remitting the revenue would still allow the tax to raise the price of dirty energy and thereby offer a competitive advantage to energy efficient appliances, cleaner vehicles, and green electricity. In addition, remitting the revenue equally across taxpayers is progressive. In a piece for the People’s Policy Project, Anders Fremsted and Mark Paul note that carbon emissions increase substantially as people’s incomes increase. The richest earners emit over 15 tons of carbon dioxide per year more than the poorest earners. Those rich earners would pay more under a carbon tax. But the dividend ensures that low-income voters are compensated for the larger percentage hit to their monthly budgets.
Those reimbursements could also allow a higher carbon tax rate. Initially, the size of the monthly dividend under the Energy Innovation and Carbon Dividend Act would be $16-$24 per month. This modest dividend would increase with the tax rate. But Fremsted and Paul propose a much higher starting price of $230 per ton, purposefully engineered to force a faster adjustment from fossil fuels. Under their scheme, the dividend would increase annual costs to the poorest 10 percent of earners by $866, while paying them $1,371. The richest individuals would pay $2,501 per year. Meanwhile, the bottom half of earners would see a boost in earnings. The same would be true under EICDA, in which dividends prove a net benefit to low and middle income households. Evidence from Canada’s carbon tax and dividend supports this argument. Their federal $40 per ton price yielded average annual net benefits to households of $74 in Ontario and $346 in Alberta, the center of the Canadian oil industry. These net earnings might just be the key to making aggressive carbon taxation politically sustainable.
