In order to address climate change the most efficient mechanism is to price carbon emissions.

James Hansen first popularized a scheme whereby an escalating carbon fee is levied at source of emission and 100% of the collected fee is returned as an equal share (dividend) to all citizens. The origin of the Fee and Dividend idea was from the book Who Owns the Sky? By Peter Barnes.

“On Earth Day 2010, Marshall Sauders (Citizens Climate Lobby founder and president) and Mark Reynolds (CCLs founding Executive Director) were on Capitol Hill lobbying for something other than cap and trade. They bumped into Dr. Hansen on the hill and showed him the (Fee and Dividend) policy and he said this is it!”

Using a simple spreadsheet model, the Fee and Dividend policy can be illustrated. In this model the independent variable is the vehicle gasoline mileage. This ranges from walkers and cyclists at 0 litres/100km through to large trucks at 20 litres/100km. To keep the model simple each driver is assumed to do 100km/day over a year. The population distribution across these vehicles is shown in the graph below.

The carbon fee is set at $80/tonne. The Fee and Dividend computation is simple. The total carbon fee in each mileage category is calculated using 2.3kgCO2/litre. The total fee collected is summed over all the 20 mileage categories as is the total population. The Dividend is calculated as:

Canada adopted a version of this Fee and Dividend as the federal carbon pricing mechanism. In Canada’s case only 90% of fees are returned and the policy only applies in provinces without their own carbon pricing mechanism.

Fee and Dividend prices carbon, rewards lower carbon choices, incentivizes innovation and is not inflationary. All without any government intervention other than to collect a fee and return it. Change requires a strong price signal. Fee and Dividend allows for Fee to grow to the cost of carbon removal and sequestration. Dividend fully mutes the financial impact on the average Canadian.

Politically any carbon pricing policy is difficult to sell to voters. This becomes particularly difficult when the advocates don’t take control of the narrative. It is very easy for opponents to attack the Fee portion of the policy like the “axe the tax” movement in Canada has been doing. To combat this the Dividend has to be front and center in the narrative of the advocates. The dividend has to arrive frequently and be fully visible to the recipients. Canada has not done a good job of controlling the Dividend narrative.

The Fee is not a tax. A tax is what you pay in Canada at the point of purchase. A fee is what you pay to play pickleball.

The Dividend is not a rebate. A rebate is what you apply to receive as a sales promotion. A dividend is what all stakeholders receive when there is a surplus.

Ontario is one of the provinces where the Fee and Dividend has been imposed by the federal mandate. On 2024 Apr 1 the carbon fee will rise to $80 per tonne. This translates into $0.19 per litre of gasoline. Last year our dividend in Ontario (2 adults) was $732. Using last years’ $65/tonne ($0.15/litre) we paid an estimated $390 in gasoline fees for our 2 vehicles. Like many Ontario residents we were net positive last year.

As the fee (x axis) is increased the dividend (blue region) will also increase. Since the dividend depends on total fee collected which in turn depends on fossil fuel consumption, the dividend will drop off from the extrapolated blue line.

It costs $600-$1000/tonne to remove CO2 from the air. The rh y axis is gasoline price (with baseline at $1.50/litre). If the carbon fee in Ontario was increased to the CO2 removal price range above our gasoline prices would increase to the current gasoline price in Norway (Yellow line).

Since the fee would rise to the price of removing carbon from air, but the dividend would begin to drop as more and more Canadians did the right things for the climate, this policy would naturally terminate when no more fees are levied in a post carbon economy.

If nothing changes the Fee and the Dividend would traverse the blue line in the graph above. If however we assume that the Fee rises by $15/tonne/yr and that a portion of the population begins to use less carbon annually we get the other scenarios in the graph. The red line assumes 1% do better each year and the yellow for 5%. As such we could measure the success of the Fee and Dividend policy by how far below the blue line we drop.

We have run this Fee and Dividend in Ontario for 5 years with the Fee starting at $20/tonne and increasing by $15/tonne/yr to the present value of $80/tonne in 2024. The business as usual blue line would represent the carbon intensity of Ontario’s population as represented by the Fee collected. More carbon could be emitted as the population increases so the Fee may rise. However since the dividend is shared equally across the population the BAU intensity would be constant. If, however, the population in Ontario begins to make better carbon choices we would expect the actual dividend line to track below the blue line. It does. This is a direct measure of the success of the Fee and Dividend program.

“How much of the Carbon Dividend would need to be spent to offset Carbon Fee on fuel for family of 4 in Ontario?”

The average Ontario driver goes 16000 km/year. Even with a 10 litre/100km SUV this average driver would only use up 25% of the Carbon Dividend to offset all the Carbon Fee on annual fuel used. This would leave 75% of the Dividend to offset other Carbon Fee expenses such as home heating.

Interestingly if things were to stay business as usual and nobody made carbon changes, the Dividend would rise in exact proportion to the Fee increase (as noted above). This means that the gasoline lines in the graph above are valid for any Carbon Fee number under this business as usual case. The Tesla 3 EV line which illustrates how many km an EV driver can go before exhausting the Dividend will only improve as Fee and Dividend increase.

Fixing the climate requires change. Canadians don’t like governments telling them how to change but understand the importance of changing. Fee and Dividend, properly explained, is simple to understand and offers total freedom of choice for Canadians.

Fee and Dividend let’s government do exactly what they know how to do best: collect and distribute revenue. With 100% dividend the invested costs are administrative and advertising. Benefit is realized with stabilized climate emissions and exportable expertise and innovation. Fee and Dividend works because the fee can be escalated to the price of removing carbon from the air and the dividend will protect the majority of consumers from financial stress. Fee and Dividend naturally rewards good carbon choices. Fee and Dividend naturally incentivizes innovation without government bureaucracy having to pick and subsidize carbon free technologies.

We collectively need to make changes to alter our climate trajectory. To do this we need to put a price on carbon and at the same time reward good carbon changes, all the while protecting the average person from financial hardship. Fee an Dividend does all these things in a very simple and elegant manner.

The short answer is NO. The dividend is indexed to the carbon fee collected. If collective behaviour results in more carbon fees being collected, the dividend will increase. Conversely if collective behaviour moves in a lower carbon direction, less fees will be collected and the dividend will be lower. As the carbon fee rate is increased, absent of any behaviour changes, the dividend will increase linearly by the same percentage.

Why does this policy work?
Ans.
It naturally incentivizes consumers to make good carbon choices. It naturally incentivizes entrepreneurs to provide those choices. All without any government bureaucracy needed. The program naturally ends when a carbon free transition is complete and no more fees are collected.

How can we measure progress?
Ans.
Since total fee collected is a measure of total carbon usage and the dividend is equally shared, if the dividend is trending below a linear extrapolation with fee increase it means success. Very easy to plot and see. In Ontario the trend is definitely below as seen in graph above.

How can consumers maximize their net dividend?
Ans.
Take public transit where possible. Travel by train if it is an option. Walk and cycle to errands more. Purchase/rent housing in walkable communities. Install a heat pump. Purchase battery powered lawn equipment. Purchase lower carbon vehicles (Hybrid, PHEV or EV).

Below are some of the counter narratives to the incessant chatter in main stream media from the axe the tax side.

What is the probability that if we vote for the “axe the tax” party that we, as consumers, will see that saving? Low to zero. The oil monopoly will simply eat it into their profit margin in short order. We have a precedent. In 2022July the Ontario government removed $0.057/litre tax from motor fuel. As evidenced in the graph from Gas Buddy below the oil companies simply absorbed that into the “noise” in the gas price fluctuations.

Whereas with the Fee and Dividend regardless of the Fee level, by design, the average consumer is made whole by the Dividend.

While the Fee and Dividend provides very powerful price signals for consumers to lower their carbon footprint and for entrepreneurs to provide ways to facilitate that switch, it can also be viewed as forced redistribution of big oil profits back to consumers.

The Canadian Federal Government has done an abysmal job promoting the fact that the carbon program in Ontario has a universal Dividend (Rebate). All of the “axe the tax” arguments completely ignore the reality that by design the Fee and Dividend program makes the average consumer whole. As a result there can be no job loss, economic hardship or inflation from this carbon program.

This one more closely aligns with the actual purpose of the Fee and Dividend carbon policy. It’s aim is to encourage end consumers to make choices which result in a lower carbon footprint. How can one “Max the Rebate”? Easy. Take public transit, walk, cycle, buy a heat pump, by electric lawn tools or buy a used EV. These are just some of the ways to lower one’s carbon intensity = maxing the rebate.

When trying to uncover underlying reasons for opposition to a policy it is often helpful to use a “Who benefits/loses” analysis.

Most of the opposition to Canada’s Fee and Dividend carbon policy is coming from Conservative politicians. At first blush this seems strange because Fee and Dividend is by far the carbon policy with the least government involvement. All the government is doing is setting a Fee, collecting revenue, dividing it into equal shares and refunding it. All things the government bureaucracy already knows how to do. Putting aside the climate denial part it would seem to be a no brainer politically for Conservatives to embrace this policy.

While the climate objective of Fee and Dividend is clear, albeit poorly marketed by promoters, it also can be viewed from a different lens. It takes would be revenue from the fossil fuel industry and gives it instead to consumers. Who stands to benefit/lose with this perspective? A clue as to who is behind the “Axe the Tax” movement might lie here.

Recently on my podcasts I’ve had to listen to advertising. Obviously the podcast content creators are using ads to help monetize their creation.

What if there was another way for content creators to monetize their endeavors than ads?

There are many content creators in our society that struggle to monetize their efforts. These include

One answer might be Fee and Dividend Universal Basic Income (UBI). In this scheme we imagine an income distribution something like this in Canada.

The UBI Fee is imposed on all top line income. All those fees are collected into a single pot by CRA. CRA then divides that pot into equal shares based on the total number of taxpayers. That share is then refunded tax free to each and every taxpayer.

Based on the distribution above and assuming Canada has 20million taxpayers we get the following UBI graph