How does a price on CO2 work?

When a product becomes more expensive, we tend to use less of it. However, CO2 emissions from burning fossil fuels currently cost almost nothing. A well known and in the long term rising CO2 price on fossil fuels would give the necessary stimulus. It would encourage industry, the energy sector, the government and citizens to invest in energy efficiency and renewable energy, and to use resources sparingly. In addition, a price for CO2 is also the most cost-effective - the CO2 reduction is achieved at the lowest possible cost, and stimulates innovative solutions. A price on CO2 makes the CO2 intensity of a product explicit. The most polluting products and energy sources automatically become the most expensive. It also makes it easier for citizens and businesses to make the most ecological decisions. For example: a price on CO2 makes train journeys cheaper compared to transport by car. In terms of heating possibilities, a heat pump will be cheaper than the traditional heating on natural gas. In the supermarket, regional fruit and vegetables will be cheaper than foreign goods.

How does a carbon fee work?

It is a fee based on the amount of carbon in a fossil fuel. Fossil fuels such as petroleum, natural gas and coal contain carbon (C). If they are burned, a powerful greenhouse gas is released, carbon dioxide (CO2). The fee is based on the number of tonnes of CO2 that the fuel would generate, and is levied at the earliest point that it enters our economy, i.e. from the source, mine or port. The fee would be low in the beginning: 15 or 20 € per tonne, and increase by 10 € each year. Under a carbon fee, the price for the emission of a tonne of CO2 is known, and this price rises in a predictable way, allowing citizens and businesses to better take this into account in their investments. The CCL advocates a carbon fee with a carbon dividend, whereby 100% of the income from the tax is returned to Belgian households.

Does this mean that petrol, diesel and natural gas will become more expensive for consumers?

Yes, that's right.
People are often evasive about how to solve climate change, but in fact it is simple: we emit too much greenhouse gas because we burn too much fossil fuel. In order to phase out the use of fossil fuels, the price of fossil fuels has to rise. In order to discourage the use of fossil fuels, but at the same time not to increase the life expectancy for the average family, we are in favour of a carbon fee with dividend.

Is it possible to be both green and social? Mustn't we make a tough choice: either we save the climate but the bill is skyrocketing for the people, or we pursue a social policy that kills the climate?

We believe that it is possible to be both green and social. What's more: A good climate policy must even be green and social. The aim of a carbon fee is to increase the difference in price between polluting and non-polluting products, so that people choose non-polluting products and solutions. In order to make the carbon fee also socially acceptable, we propose to distribute the entire proceeds of the fee back equally among the people (the so-called "carbon dividend"). This ensures that the average tax burden does not increase. In fact, this principle can just as easily be called a redistribution mechanism: a redistribution from those who pollute a lot to those who pollute a little. And in general, this also means a redistribution from rich to poor, because the lowest incomes usually have a lower ecological footprint.

Isn't the carbon fee and dividend a pay out and claw back operation ?

One could argue: if people have to pay more for fossil fuels, but at the same time receive a carbon dividend to pay this extra price, why should they change their behaviour, and reduce their emissions? People will change their behaviour, because the carbon fee they have to pay depends on their fossil fuel consumption, while the carbon dividend they receive does not depend on it. People will want to keep as much of the dividend they receive as possible, rather than spend it on more expensive fossil fuels. They can do this by installing energy-efficient lighting and appliances, by better insulating their walls or windows, by replacing an old boiler with a geothermal heat pump. When buying a new car, they will look more at fuel consumption, and perhaps prefer to buy an electric car. They will prefer cheap electricity from renewable energy to expensive electricity from fossil fuels. The same goes for investors and companies. As the fee increases, it will become an increasingly important factor in making business decisions.

Is a carbon fee really fair?

There is seldom any discussion of who actually pays for the costs of climate change. But at the moment, the fossil fuel industry is making billions of dollars in profits, while the consequences of climate change: extreme droughts, extreme precipitation, floods, climate refugees ... are for the account of the ordinary population. An expense that will rise exponentially as climate change worsens. Surely not a fair situation. On the other hand, if a carbon fee is introduced, the damage caused to the planet will be included in the price of fossil fuels. Whoever pollutes the most will have to pay the most. This is a much fairer system. The most important effect of a carbon fee is, of course, that it has a discouraging effect: CO2 emissions will decrease, we will be able to prevent the worst damage to the planet. A carbon tax will channel investor money to innovative companies working on renewable energy and CO2 saving technologies. And this will also give citizens more opportunities to choose ecological products. The CCL's solution, to return 100% of the proceeds of the carbon fee to the citizens in the form of a carbon dividend, also makes this solution socially just.

Why increase the carbon fee every year?

The price of the carbon fee must be high enough to trigger real change. On the other hand, we want to give citizens and businesses time to adapt. That is why the fee would be low at the outset: 15 or 20 € per tonne, and increase by 10 € each year.

Why revenue-neutral ?

Taxes are unpopular, and revenues tend to disappear silently into the state coffers. However, the purpose of a carbon fee is not to feed the public purse, but to create an incentive to emit less CO2. In order to make the carbon fee socially equitable and politically feasible, we propose to distribute the proceeds of the carbon fee equally among all the citizens of the country, in the form of a carbon dividend. Scientific research has shown that an ordinary carbon fee has a negative impact on the economy, while a 100% revenue-neutral carbon fee promotes economic growth.

What are the consequences of a carbon fee and dividend for the economy?

In 2013, Regional Economic Models Inc. (REMI) conducted a scientific study on the impact of a revenue-neutral carbon fee on the US economy. REMI used different macroeconomic models to compare different scenarios. The findings: such a policy would have a strong positive impact on the economy, employment and public health.

Why a carbon dividend and not a tax cut?

One could, of course, return the proceeds of the carbon fee to the public in another way, for example by means of a tax reduction. Scientific research on a revenue-neutral carbon fee concludes that a tax cut has a slightly better result than a carbon dividend (although a carbon fee with dividend still has a strong positive effect on the economy). So why does the CCL still advocate a dividend?

  • It is difficult to justify spending the proceeds of the fee on other purposes, because the long-term goal of the fee is to reduce CO2 emissions to zero (and thus revenues as well).
  • Paying a fixed amount per person as a carbon dividend has the advantage that it is simple and transparent. Any other distribution threatens to lead to endless political discussions. A dividend is politically neutral.
  • Paying a fixed amount per person is also administratively the easiest thing to do.
  • It is the best way to guarantee that the carbon fee does indeed remain revenue-neutral. Otherwise, any price increase could give rise to the suspicion that the government mainly wants to generate extra income instead of reducing CO2 emissions.
  • A tax reduction would not reach certain population groups, such as pensioners and the unemployed, but they would need extra money to pay for the more expensive fuels. A carbon dividend will benefit everyone.

Is a carbon fee not a case of: the polluter pays, but also: the payer pollutes? If you pay enough, you can continue to pollute.

Climate change cannot be stopped by good intentions alone. People have been calling on their good hearts for more than 20 years. As a result, emissions in Belgium have decreased by 5% since 2005. It is clear that we will not get there in this way. We need to get everyone on board, including those who do not care about the climate and the environment. This can only be achieved by imposing a tax on pollution that is high enough to have an effect. Those who do not care about the climate are usually more concerned when they feel it in their wallets. If we want to achieve a carbon-neutral society by 2050 and preferably sooner, that will cost money, a lot of money. Money for electric cars, for heating with heat pumps, for insulation ... A carbon tax allows the polluters to bear most of this cost. The alternative is government subsidies ... and then this cost reaches the taxpayer, like a sort of Turtle Tax squared.

Shouldn't the government focus more on public transport, subsidies for heat pumps, insulation, etc.?

We need a measure that provides an incentive to burn less fossil fuels across all human activities. If you only deal with certain activities and not others (for example: only the transport sector), you run the risk of " carbon leakages": what is saved in one sector in terms of CO2 emissions is extra emitted in another sector. That is why the carbon tax with dividend is an essential basic policy, which can then be complemented by additional measures and government subsidies.

Shouldn't we focus rather on technological innovations?

Technological innovations are desperately needed. However, current market conditions are such that there is not enough money to be made with these innovations, so they are not implemented on a sufficiently large scale and at sufficient speed to prevent a climate catastrophe. Renewable energy, for example, is growing exponentially, even without a significant climate policy. But the economy, and with it our energy consumption, is also growing exponentially. As a result, by 2050, if policy remains unchanged, it is projected that only half of all energy produced will be renewable. The carbon fee and dividend increases the difference between polluting and non-polluting technologies. Investing in non-polluting technologies becomes more financially attractive. A carbon tax with a dividend will significantly accelerate the development and deployment of green technologies.

How does a cap and trade system work?

A cap and trade system is another way to set a price on CO2 emissions. Each year, a certain amount of CO2 emission rights are provided (cap = upper limit). This quantity is reduced every year. The emission rights are distributed to the companies, or auctioned. For every tonne of CO2 emitted by the companies, they must have an emission right. Companies can make investments to reduce their CO2 emissions and then sell their surplus emission rights to other companies (trade). This makes it profitable for companies to invest in low-carbon technologies. A cap and trade scheme sets a price on CO2 emissions, but this price is unpredictable and volatile, depending on supply and demand on the market. The unpredictable price makes companies reluctant to make investments to reduce their CO2 emissions.

Europe already has a cap and trade system (the EU ETS). So why demand an extra price on CO2 ?

The European Emission Trading System (ETS) regulates barely half of all CO2 emissions. Moreover, under the lobbying of the industry, far too many emission rights have been allocated, which has caused prices to collapse. What made the situation even worse are the " carbon offsets". Energy suppliers can buy carbon offsets from projects that claim to have reduced CO2 emissions, which gives them the right to burn more fossil fuels. However, it is very difficult to prove whether a project has actually saved CO2 emissions (e.g. if a wind farm is built, are CO2 emissions avoided, because otherwise a coal-fired power plant would have been built on that site? Or would the wind farm have been built also without the carbon offsets? ) As a result, the price of an emission allowance has been far too low for years to encourage sufficient investment in renewable energy and energy efficiency.

What should be done to reform EU ETS ?

The CCL prefers a carbon fee dividend to an emission trading scheme because of the problems mentioned above. However, we take into account that it may not be politically feasible to replace European emissions trading with a carbon fee and dividend. In that case, the next reforms to the existing system will have to be carried out:

  • In the European emissions trading system, a surplus of certificates has arisen amounting to more than 2 billion tonnes of CO2 (in 2015, the total CO2 emissions of the EU were around 3.5 billion tonnes). In recent years, more certificates have been issued on the market than necessary. Without scarcity, there can be no solid CO2 price, which is the trigger for long-term investments. This surplus must therefore be withdrawn from the market.
  • A continuously rising minimum price must be introduced at the auction of the certificates. This would lead to more planning certainty for investors.
  • EU emissions trading should be extended to all sectors of industry, as well as to private emissions (e.g. for heating of buildings) and traffic. The amount of certificates issued could then be directly derived from the EU's reduction targets.

Shouldn't the government invest the proceeds of a carbon fee in climate protection measures?

A price on CO2 leads to CO2 emissions being saved where it can be done in the cheapest way. In this way we automatically take the best measures to protect the climate. However, if the proceeds of the fee are used for specific measures and the promotion of specific technologies, this may distort the market and possibly cancel out the beneficial effect of a CO2 price.

Why pay out the carbon dividend to the citizens and not to the companies?

Companies will indeed have higher costs due to the carbon fee, as fossil fuels become more expensive, and so will their production and transport costs. However, companies will pass on these higher costs to their customers. So it is the citizen who pays the CO2 price for emissions that cannot yet be avoided. That is why the citizens must also receive the carbon dividend.

Who benefits from the carbon fee and dividend?

In the long term, it is, of course, in the interests of all of us to stop climate change and to preserve a livable planet. In the short term, anyone who emits less CO2 than the average of the population has a financial advantage. People with a higher than average CO2 footprint will have to pay net. In practice, this means that most low and middle-income households will benefit financially from the carbon fee and dividend. The lowest incomes generally have a smaller CO2 footprint, they fly less often, drive less by car and consume less than the wealthy. In Canada, 8 out of 10 households benefit from this policy.

Isn't a carbon fee and dividend complicated to implement?

No, it's going to be very simple. Every citizen gives the account number to which his or her dividend can be deposited. The children's dividend can be paid out together with the child benefit.

Wouldn't the carbon tax hit the lowest incomes hardest?

No, the lowest incomes usually have a lower CO2 footprint and will therefore benefit more from this plan. Nevertheless, reducing CO2 emissions can be a problem for the poor in our society. After all, in many cases one has to invest first in order to be able to reduce CO2 emissions. For example: an energy-efficient refrigerator is more expensive to buy than an electricity-guzzling appliance. Making buildings energy efficient also often leads to higher rents for the residents. These examples make it clear that the decarbonisation process must go hand in hand with social measures.

A carbon dividend would also be paid to millionaires. Is this fair?

Paying a fixed amount per person as a carbon dividend has the advantage that it is simple and transparent. Any other distribution threatens to lead to endless political discussions. In fact, the carbon fee should primarily serve to protect the climate, and should not cause any unnecessary extra administration. There are more suitable means for social redistribution.

There are already so many rules regarding the environment. And now a carbon fee?

In the long term, a CO2 price would render many - often unnecessarily complex - rules superfluous. In contrast to the current detailed legislation, the CO2 price creates an incentive that affects all aspects of life and all sectors of industry. At the same time, the carbon fee gives everyone the freedom to choose how much CO2 they want to save and in what way. An effective carbon fee would also ensure that renewable energy and storage technologies become profitable without subsidies and feed-in tariffs.

Who else is pleading for a carbon price?

In the run-up to the Paris Climate Summit, the "Carbon Pricing Leadership Coalition" was set up in 2015 at the initiative of the World Bank, and has since been joined by more than 70 countries, many regional and city councils and some 1,000 companies. There is a broad consensus among economists that a carbon price is essential to stop climate change. Many economists, such as Paul Krugman, Lord Nicholas Stern and the Nobel Prize winner for economics, Joseph Stiglitz, have called for a carbon fee. In January 2019 an open letter was published, signed by more than 3,500 economists, including 27 Nobel laureates, calling for a carbon fee and dividend.
A similar letter was published in Belgium in March 2019, signed by many economists and environmental scientists, including professor Paul De Grauwe. Climate scientists such as James Hansen are also in favour of a carbon tax.