Carbon fee and dividend – how it would work

In my first post, I introduced the idea of carbon and fee and dividend. Now I want to look at how it would work in the UK.

Fees steadily rise and are economy-wide, paid by companies that sell fossil fuels in the UK. The tax would steadily rise at a rate set by an independent body such as the Climate Change Committee to give the policy institutional certainty and bankability. This would mean that the price of burning fossil fuels account for their true social and environmental costs.

Fees are structured around border carbon adjustments, to create a level playing field for domestic and international producers so that companies which export carbon intensive products into the UK will be subject to the same level of carbon tax as domestic producers, helping industries like the Welsh steel sector.

Dividends from carbon taxation are returned directly to individual households so they can invest in measures to reduce their own carbon footprint and offset any initial increases in energy prices. People should be able to borrow against their future dividend payments for investments in energy efficiency.

Environmental regulations are rationalised without reducing environmental protection. Eventually at least 10 direct carbon taxes would be rationalised into a single unified price paid for emitting carbon dioxide and other greenhouse gases in the UK. For example, we would no longer need the Climate Change Levy, but we should continue with energy efficiency standards and energy labelling.

What would the impact be?

Estimates suggest that we could prevent 230,000 premature deaths over 20 years from improved air quality alone, on top of climate change reversal and we could also create 2.8 million extra jobs.

The REMI Study in the US examined the effect of a progressive fee and dividend (F&D) carbon tax, starting at $10 per ton of CO2 on the national economy as well as the economies of nine regions of the US. The study then compared these results to the baseline case where there is no price on carbon.

Study Highlights:

  • CO2 emissions decline 33% after only 10 years, and 52% after 20 years relative to the baseline, $0/ton of CO2 case.
  • National employment increases by 2.1 million jobs after 10 years, and 2.8 million after 20 years. This is more than a 1% increase in total US employment we don’t get without a carbon fee!
  • 13,000 lives are saved annually after 10 years, with a cumulative 227,000 American lives saved over 20 years.
  • $70-$85 billion increase in Gross Domestic Product (GDP) from 2020 on, with a cumulative increase in national GDP due to F&D of $1.375 trillion.
  • Maximum cost-of-living increase by 2035 is 1.7-2.5%, depending on region. That’s 1 year’s normal inflation spread over 20 years.

This policy change would give notice to fossil fuel companies that we will no longer tolerate practices which put profit before planet, but that we’re serious about providing business with the means to change and provide citizens with the financial resource through green jobs and a financial return on carbon taxes to meet our responsibility to the planet.

Importantly, it would firmly position the Liberal Democrats as a party serious about the climate crisis and as a party committed to supporting households to weather the changes needed to protect our environment for future generations.

* Rhys Taylor is leader of the Liberal Democrat group on Cardiff Council.

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This entry was posted in Op-eds.


  • Robert Johnston 16th Oct '19 - 10:51am

    I have also written in LDV and elsewhere on the benefits of a carbon tax and strongly support it. However, implementation has some serious challenges and associated choices. Problem with where the dividends would go – I would like to see the idea of a negative carbon tax worked out; this would provide dividends to developing carbon capture and similar technologies as well as tax claims for energy efficiency in the home. This may also avoid upsetting the indented correction to the price mechanism.

    Tariffs are also problematic and would have to be negotiated within WTO rules – forming a carbon club with similar countries and blocks would be the way forward. But slow. UK alone won’t achieve much other than feeling good about itself.

    A link to the REMI Study would be nice.

  • John Marriott 16th Oct '19 - 11:05am

    And how many angels CAN stand on the end of a pin? We are in grave danger of over complicating what ought to be a no brainer. The world is getting warmer. Can we really do anything to cool it down? (Answers on a sheet of A4.) Mind you, until we can get the major polluters on board, we are just p…..g in the wind!

  • Robert Johnson – “Tariffs are also problematic and would have to be negotiated within WTO rules – forming a carbon club with similar countries and blocks would be the way forward. But slow. UK alone won’t achieve much other than feeling good about itself.” – we can get the EU on board with carbon tariff, as Macron is also rumoured to be favour of such proposal. We can even win over the US if the Democrats win the upcoming election. Carbon tariff will be deducted for countries that have their own carbon tax program.

  • @John Marriott
    I could not agree more with your sentiments, at my age it is a shame I will not be around to share this rose tinted future. Climate change is a very complex issue and needs very careful handling or you can alienate ordinary people worldwide and of course this a Worldwide! problem. Also we must be aware of the Trumps of this world.

  • Laurence Cox 16th Oct '19 - 5:11pm

    Whilst carbon taxes are a good idea in principle, talking about them in terms of $/tonne of CO2 doesn’t make any sense to the consumer. As I said in my comment to Rhys’ first article:

    My electricity [and gas] supplier (Bulb) charges 12.94p/kWh for electricity (100% renewable) and 3.21p/kWh for gas (10% renewable, with the other 90% carbon offset).

    So what effect would a carbon tax of £8 (roughly equivalent to $10) per tonne CO2 have on the price of my gas?

    A cubic metre (m^3) of methane (1 unit on my gas meter) is equivalent to approximately 11 kWh, so I am paying about 35.3 p/m^3. 1 m^3 of methane will create 1 m^3 of CO2 at the same temperature (plus water vapour) and 1 m^3 of CO2 will weigh approximately 2 kg (44 g of CO2 fills a volume of 22.4 litres at STP and 1 m^3 = 1000 litres). So 500 m^3 methane needs to be consumed to generate 1 tonne of CO2, which would cost me about £176 before carbon tax.

    It is obvious that an additional charge of £8 on £176 is hardly going to change behaviour; indeed we need to be looking at carbon taxes of the order of 10-20 times higher to really change behaviour. Unless we start discussing carbon taxes in terms of what it means to the consumer, there is a real danger that proponents will argue for carbon taxes that will have no real effect on fossil fuel usage in the UK.

    I should also add that it is dangerous to transfer US studies to the UK without considering that petrol and diesel are far more highly taxed in the UK than they are in the US and that coal-fired power generation is a far bigger source of electricity in the US than it is in the UK where, this summer we have had weeks with zero use of coal-fired power stations.

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