Carbon Fee-and-Dividend; How It Works
The best way to discourage the use of fossil fuels is to raise their prices. Business leaders and economists have recommended a “carbon tax” for this purpose for many years. A system called “carbon fee-and-dividend” will have a similar effect, but it will not be a tax. Impose fees on all fossil fuels, collect them at the source [mine, well, port of entry], and return the revenues to the people as dividends. There follows an analysis to illustrate how this system will work.
<> Assumptions for Analysis
OFF by 2050: Set the goal to stop burning fossil fuel by 2050 and call the program “OFF by 2050.” Let 2011 be Year 1 and 2050 be Year 40. We don’t know now how to achieve this goal, so assume equal reductions in CO2 emissions of 2.5% of current values in each year, 25% in each decade.
CO2 Emissions: Total US CO2 emissions in 2007 before recession were 5.99 billion metric tons. [From www.eia.doe.gov/emeu/mer/query/mer_data.asp?table=T12.01] Assume they are 6.0 billion tons at start of program in 2011.
CO2 Fees: Assign fees to fossil fuels [coal, oil, natural gas] so that all are treated equally in terms of the carbon dioxide they produce. For illustration start this at $11.50 per metric ton of CO2 in Year 1. This will raise the price of gas by 10 cents per gallon at the pump, and the price of coal-generated electricity by 0.8 cent per kwh. [Hansen 2009]
Raise the fee by the same amount each year. If there are no improvements in efficiency or yield, the effect in Year 10 will be to raise the price of gas by $1.00 per gallon and the price of coal-generated electricity by 8.0 cents per kwh.
The fees used in the analysis here are in terms of current dollars. As the actual program goes forward, fees should be adjusted for inflation.
An interactive spreadsheet model on the website hosted by the Carbon Tax Center projects that the fee proposed here actually will reduce CO2 emissions by about 25% in the first decade.
Use a model of this kind to project a trajectory of declining emissions over all years in the program. Compare actual CO2 emissions each year to this trajectory. Adjust the fees if, after several years, actual emissions deviate too much from the trajectory.
Population: The US Census Bureau provides estimates of past and future population. I have used these for the period thru 2050.
Shares and Dividends: Assign one share to each legal adult resident 18 years old or more and one half share to each legal minor resident 17 years old or less. Estimates from census data show that these groups are 76% and 24% of the population, respectively.
Consider a reference family with two adults and two minors and assign it three shares.
The proposal is to share CO2 revenue among all legal residents. There is no reliable data for non-legal residents, but a widely used estimate today is 12 million, about 4% of the current population.
I combine these factors in the equation below and estimate that, on average today, 84 shares will be assigned to each 100 residents.
100 x (100% – 4%) x ( 76% + ( 24% / 2 ) ) = 84
I have no basis for refining these numbers further, so will assume that the shares are 84% of the population for the entire 40 years.
Administrative Costs: Government workers will have to collect the fees, maintain a database of legal residents, and distribute the dividends. I guesstimate this to be 1% of revenue and conclude that 99% of revenue will be distributed as dividends in the year following collection, say by checks sent out in March and September.
GDP: Using numbers from the Commerce Department I found that per capita GDP adjusted for inflation rose quite steadily over the last 60 years at an average annual rate of about 1.9%. I use this rate to project GDP forward. It produces an average 3.0% annual growth of GDP thru 2050. This seems reasonable.
<> Observations from Analysis
To see the detailed analysis click spreadsheet. Highlights of the analysis follow.
Dividends per Share and for Family: Revenue from 2011 will produce dividends in 2012 in the amounts of $260 per share and $779 for the reference family of four. These will rise to $1,732 per share and $5,197 for the family in 2020. They will peak in 2030 at $2,297 per share and $6,890 for the family and then decline. A chart on page 2 of the spreadsheet shows this gradual rise and fall.
Cumulative Dividends: Cumulative dividends will be $31,082 per share in 2030 and $62,593 per share in 2051 when the 40-year program is complete and the goal met. Cumulative dividends for the family for these years will be $93,247 in 2030 and $187,780 in 2051. These are substantial amounts. People will be able to pursue many options as they adjust to rising prices of products and services that depend on fossil fuels.
Fee Revenues and GDP: Overall fee revenue as a percentage of GDP will plateau at 3.0% in the years 2023 to 2028 The amount will peak at $724 billion in 2030 and 2031.
Incentives for Business: Fees will generate $19.8 trillion over 40 years, an average of half a trillion a year in current dollars. This will be a huge source of purchasing power, and it will produce a great outpouring of business energy and creativity.
We will probably see near complete conversion to electric vehicles, using batteries that are charged from a smart power grid, that is connected to a new fleet of 3rd and 4th generation nuclear power plants. And high speed, inter-city, electric trains that replace most domestic air travel. And ways to store the energy from wind so it can be used when the wind is not blowing. And smaller scale, more diversified agriculture that is nearer to where people live. And fast growing algae that draws CO2 from the atmosphere and is heated in kilns without oxygen to produce biochar, that is added to soil to sequester carbon. And many more things that we have not yet dreamed of.
It will be an exciting time.
Bill Allen, July 31, 2010 <OFFby2050>