Carbon Fee and Dividend vs The Alternatives

Carbon Fee and Dividend


The Carbon Fee and Dividend (CF&D) is an alternative to a Carbon Tax and is favored by many economists. It is called a “fee” rather than a “tax” because the full amount collected is returned directly to the public. A tax is a levy imposed to raise revenue to fund government services. The purpose of the carbon fee is to discourage greenhouse gas emitting activities.

One of the great features of the fee is that it incorporates inherent economic benefits favoring the least affluent among us. It works like this. A fee is collected directly at the point of production or the point of entry for any fossil fuels. That fee is returned as a monthly or quarterly direct payment to every legal resident. Each person gets an equal share. More affluent people tend to use much more fossil fuels. They drive bigger cars, heat bigger houses, drive more, and fly more. The dividend payment they receive will likely not cover the additional costs they incur because of the fee. Less affluent folks generally use much less fossil fuel. Consequently, they will, be paid more, sometimes much more, than their additional costs due to the fee.

An important observation is that currently fossil fuels exert a large and unpaid-for burden on society in the form of pollution – Carbon dioxide, methane, nitrous oxide, sulfur dioxide, heavy metals including large quantities of airborne mercury, smog, and toxic waste in the form of coal sludge. Each year coal burning produces poorly contained or uncontained waste containing 13 tons of mercury, 3236 tons of arsenic, 189 tons of beryllium, 251 tons of cadmium, and 2754 tons of nickel, and 1098 tons of selenium. Economists call this kind of unpenalized polluting activity an “externality”. What it really means is that fossil fuel companies are using the environment to dump their dangerous waste products and expecting the public to pick up the tab in the form of damaged health, degraded environment, and climate change.

The carbon fee levels the playing field allowing cleaner energy production to compete more fairly by charging the fossil fuel industry for the damage they are creating.

CF&D and Carbon Tax

Both the CF&D and Carbon Tax establish a cost for carbon emissions – generally a dollar amount per ton of CO2.  For example, there is 0.43 metric tons CO2 per barrel of oil.  If the Carbon Fee or Tax was $10/Ton then this would impose a $4.30 cost onto each barrel extracted or imported.  Any fossil fuel extracted or imported would be subject to this fee.  The approach would use the existing tax and import infrastructure.  There would be no need for additional regulatory bureaucracies.  Carbon is reduced by making it less economically attractive.  Economists believe that this will result in conservation, adoption of alternative sources, and increased innovation developing new alternatives.

It is essential to understand the difference between the fee and tax approaches. In the fee approach, 100% of the money collected is returned directly to the public. In the tax approach, some or all of the money is used to fund government operations or programs. This is a vital distinction.

One of the big challenges to climate legislation is that we need a bi-partisan solution.  New taxes are always a major source of contention. If it is structured as a fee and dividend, it is much more likely to be acceptable to legislators who don’t want to be seen as raising taxes.

Another benefit is the fee will likely gain a certain momentum as people come to expect their Carbon Dividend.  This momentum will support it’s continuation and expansion.

Of course, there are many who see the revenue and want to spend it on their own pet projects. It is important to resist this inclination. Spending the money makes it more difficult to gain agreement to keep the fee, and it makes it more difficult to set the fee at a high enough level to achieve the decarbonization we need.

The CF&D and Carbon Tax both approach the problem of decarbonization by raising costs on carbon polluters.

The “Cap and Trade” proposal takes a different approach so it is interesting to contrast them.

Cap & Trade (CaT):

I have attempted to keep this simple, but it’s about to get interesting.  Let’s try and understand Cap & Trade.  According to Wikipedia, “Cap and trade is a government-mandated…approach used to control pollution…  A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that may be emitted. The limit or cap is allocated and/or sold by the central authority to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Permits (and possibly also derivatives of permits) can then be traded on secondary markets.  For example, the EU ETS trades primarily in European Union Allowances (EUAs), the Californian scheme in California Carbon Allowances, the New Zealand scheme in New Zealand Units and the Australian scheme in Australian Units.  Firms are required to hold a number of permits (or allowances or carbon credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their volume of emissions must buy permits from those who require fewer permits…  The transfer of permits is referred to as a “trade”. In effect, the buyer is paying a charge for polluting, while the seller gains a reward for having reduced emissions.”

The most salient feature of Cap and Trade that leaps out at me when I read that description is the massive regulatory infrastructure that is required to manage it.  An entire methodology needs to be developed to determine the appropriate caps.  An entire new market needs to be created and managed.   Individual company’s emissions need to be quantified & monitored.  Penalties need to be established.  Judicial procedures need to be established.  Enforcement mechanisms need to be implemented.  Etc…

But there’s a basic philosophical difference between CaT and the other two approaches. CaT legitimizes the pollution by providing permits for its discharge. CF&D and CT can be thought of a penalties (or fines) for polluting.




  • Is economically progressive
  • Has inherent, self-perpetuating mechanisms
  • Penalizes the polluters
  • Provides incentives for energy efficiency
  • Provides incentives for clean energy production
  • Reduces CO2

Carbon Tax

  • Is economically regressive
  • Is constantly at risk from “tax cutting” politicians
  • Penalizes the polluters
  • Provides incentives for energy efficiency
  • Provides incentives for clean energy production
  • Reduces CO2

Cap and Trade

  • Extremely complex to implement and administer
  • Not understandable by the general public
  • Economically regressive
  • Legitimizes polluters
  • Requires large, expensive, complex bureaucracy
  • Imposes large regulatory burden on economy
  • Reduces CO2



If you are interested in learning more about the Carbon Fee and Dividend or if you would like to support it I encourage you to get involved with
Citizens’ Climate Lobby, a non-profit, non-partisan, grassroots advocacy organization focused on national policies to address climate change.

Explore more here:

What is a Carbon Fee and Dividend?

LA Times Op-Ed: Why fee and dividend is better than cap and trade at fighting climate change

The Imperative of a Carbon Fee and Dividend

NYT: The Case for a Carbon Tax

Shell: internal carbon pricing and the limits of big oil company action on climate

Letter From Six Major Oil Company CEO’s Calling For Carbon Tax

In Stunning Reversal, ‘Big Oil’ Asks for Carbon Price

Updated: January 2, 2018 — 1:35 am


Add a Comment
  1. Greatly appreciate the clarity and no-nonsense character of this explanation and will take a copy to my meeting of the CCL chapter in case someone needs clarification. Thanks!

    I have a comment, but don’t want it to be posted…as it’s not essential to your blog.

  2. Thank you for the comment Jean. I hope this wan’t the comment you didn’t want posted. If so, let me know and I will remove.

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