Table Of ContentCARBON
PRICING:
THE
UNEXAMINED
CASE
FOR
THE
CARBON
FEE
AND
DIVIDEND
POLICY
(“CARBON
TAX”)
by
Robert
A.
Archer
SUMMARY:
The
growing
support
for
carbon
pricing
leads
to
two
systemic
approaches:
a
revenue
neutral
carbon
fee
(“carbon
tax”)
and
household
dividend
versus
cap
and
trade.
The
U.S.
analyses
on
these
options
do
not
address
their
viability
in
low-‐
and
middle-‐income
countries
where
the
greatest
emissions
occur.
They
do
not
recognize
two
characteristics
of
many
of
these
countries
that
must
be
considered
in
the
choice
between
the
two
policy
options:
weak
institutional
capacity
and
corruption.
Carbon
pricing
must
work
in
the
major
emitting
low-‐
and
middle-‐income
countries
with
institutional
weakness
and
serious
corruption
including
China
and
India.
Just
nineteen
countries
with
these
characteristics,
excluding
China
and
India,
constitute
the
second
largest
emissions
group
ahead
of
the
U.S.
and
behind
only
China.
In
this
context,
cap
and
trade
is
a
mismatch
due
to
its
complexity,
administrative
burden
and
discretion,
“flexibility”
and
non-‐transparency.
Such
a
system
will
facilitate
the
growing
concentration
of
power
and
wealth
among
the
political
and
economic
elites.
A
carbon
fee
and
dividend
does
not
have
these
disadvantages.
It
is
“administration-‐lite”,
transparent,
would
reside
in
the
strongest
ministry
(finance/tax
authority),
and
provide
predictable
revenues
for
household
dividends,
unlike
cap
and
trade.
A
carbon
fee
and
dividend,
a
fiscal
tool,
would
receive
oversight
as
part
of
the
countries’
IMF
relationship.
Regular
distribution
of
the
revenues
to
households
would
cover
household
costs
of
the
low-‐carbon
transition,
build
political
will
and
address
a
key
policy
problem:
uneconomic
energy
prices
and
affordability.
The
U.S.
and
international
community
need
to
advocate
the
advantages
of
the
carbon
fee
and
dividend
as
the
workable
alternative
and
avoid
the
slow
faux
implementation
of
cap
and
trade
and
disappointing
CO2
reductions.
The
world
cannot
afford
another
lost
decade
of
cap
and
trade.
I.
BACKGROUND
For
a
considerable
time
the
climate
change
dialogue
has
focused
on
the
science
and
impacts
and
less
on
systemic
solutions.
Concern
is
shifting
to
systemic
solutions,
specifically
carbon
pricing.
The
World
Bank
Statement
on
Carbon
Pricing
has
been
signed
by
73
countries,
1000
companies
and
investors
and
37
©
2015
Robert
A.
Archer
1
non-‐governmental
organizations.[1]
This
discussion
will
grow
as
the
December
2015
Paris
U.N.
Framework
Convention
on
Climate
Change
negotiations
approach.
Carbon
pricing
is
the
systemic
economic
and
efficient
policy
approach
to
address
climate
change,
unlike
regulatory
approaches.
Two
options
are
broadly
considered:
a
carbon
fee
(commonly
referred
to
as
a
tax)
and
cap
and
trade.
While
both
are
being
tested
increasingly,
cap
and
trade
has
a
longer
mixed
history
in
Europe
and
sub-‐nationally
in
the
U.S.
due
to
U.S.
advocacy
in
the
early
Kyoto
negotiations.
[2]
There
is,
however,
growing
discussion
and
support
for
a
revenue
neutral
carbon
tax
policy.
U.S.
advocacy
will
be
essential
to
advance
the
policy.
A
three
part
revenue
neutral
carbon
fee
concept
is
gaining
increased
support
in
national
and
international
discussions.
It
consists
of:
(1)
a
steadily
increasing
carbon
fee
imposed
at
the
source
on
coal,
oil
and
gas;
(2)
all
revenues
returned
in
an
equal
per
capita
“dividend”
via
monthly
or
quarterly
check
to
all
households;
and
(3)
a
“carbon
duty”
imposed
at
the
border
to
stimulate
harmonization
of
carbon
fees
among
nations
and
address
adverse
competition
from
countries
without
a
carbon
fee
(“free
riders”).
The
purpose
of
this
paper
is
to
compare
the
applicability
of
the
carbon
fee
and
dividend
versus
cap
and
trade
in
low-‐
and
middle-‐income
countries
based
on
their
critical
characteristics—institutional
weakness
and
corruption.
Finally,
it
is
essential
to
keep
in
mind
that
climate
change
is
global
and
requires
multiple
national
systemic
responses.
[3]
The
response
needs
to:
(i)
achieve
support
across
the
political
spectrum;
(ii)
create
on-‐going
broad-‐based
support;
and
(iii)
provide
economic
incentive
for
all
countries
to
act.
U.S.
regional
and
state
approaches
and
energy
regulatory
sub-‐sector
approaches
are
not
cost-‐
effective,
not
systemic
and
cannot
provide
the
economic
incentive
for
other
countries
to
act.
They
will
not
achieve
the
global
systemic
impact
needed
to
change
the
carbon
emissions
trajectory
globally.
©
2015
Robert
A.
Archer
2
II.
CARBON
PRICING:
DEFINITION
OF
CARBON
FEE
&
DIVIDEND
AND
CAP
&
TRADE
Carbon
pricing
is
a
widely
accepted
economic
concept
that
addresses
the
negative
external
cost
on
others
of
generating
carbon
pollution.
There
are
two
systemic
approaches
to
carbon
pricing.
“It’s
not
a
tax
if
the
The
carbon
fee
and
dividend
is
a
price-‐based
system
government
doesn’t
that
affects
prices
throughout
the
economy
and
keep
the
money.”
alters
consumption
and
investment
decisions.
Cap
Former
Secretary
and
trade
is
a
quantitative
system
that
seeks
to
limit
George
Shultz
(cap)
the
amount
of
emissions
from
polluting
entities.
Carbon
Fee
and
Dividend
Defined
The
term
“carbon
fee”
is
used
rather
than
carbon
tax.
This
is
not
an
effort
to
hide
a
tax
but
because
of
the
succinct
observation
of
Former
Secretary
of
State
and
Treasury
Secretary
George
Shultz
(and
Citizens’
Climate
Lobby
Advisory
Board
Member)
that:
“It’s
not
a
tax
if
the
Government
doesn’t
keep
the
money.”
[personal
communication,
Peter
Joseph,
2014]
Hence,
the
principle
of
full
return
of
all
revenues
to
every
household
is
a
significant
element.
It
is
“revenue
neutral.”
For
purposes
of
this
analysis,
the
“carbon
fee
and
dividend”
is
defined
as
the
three
part
revenue
neutral
concept
of:
(1)
a
steadily
increasing
carbon
fee
imposed
at
the
source
on
coal,
oil
and
gas;
(2)
all
revenues
returned
in
an
equal
per
capita
“dividend”
via
monthly
or
quarterly
check
to
all
households;
and
(3)
a
“carbon
duty”
imposed
at
the
border
to
stimulate
harmonization
of
carbon
fees
among
nations
and
address
adverse
competition
from
countries
without
a
carbon
fee
(“free
riders”).
Cap
and
Trade
Defined
“Cap
and
trade”
is
a
system
that
places
an
administrative
cap
or
limit
on
emissions
(usually
based
on
a
baseline)
by
the
government
and
the
authorization
to
emit
in
the
form
of
allowances
issued
by
a
governing
body.
Such
governing
bodies
often
have
significant
administrative
discretion
in
the
complex
forecasting
of
emissions,
determining
the
quantity
of
permits
to
be
issued
and
intervening
when
the
price
of
allowances
is
too
high,
low
or
variable.
Each
emission
source
©
2015
Robert
A.
Archer
3
must
report
accurately
its
emissions
and
submit
allowances
equal
to
its
emissions.
[4]
Allowance
trading
is
a
central
feature
that
allows
emitting
entities
to
sell
and
purchase
allowances
to
meet
their
requirements.
To
date
it
has
generally
involved
the
financial
sector
as
well
and
establishment
of
trading
markets.
Also,
banking
of
allowances
has
been
a
feature
of
the
European
Union
Emissions
Trading
System
(EU
ETS)
that
allows
emitters
to
buy
and
hold
allowances
against
their
future
pollution.
Additionally,
the
purchase
of
“offsets”
in
developing
countries
through
participation
in
clean
energy
projects
(Kyoto
Accord
Clean
Development
Mechanism
(CDM)
and
Joint
Implementation)
or
forestry
preservation
or
planting
(UN
Program
on
Reducing
Emissions
from
Deforestation
and
Forest
Destruction-‐-‐
REDD
and
REDD+)
has
occurred
extensively
with
significant
abuse.
[5]
Historically,
the
cap
and
trade
concept
has
been
more
considered
and
advocated
going
back
to
the
pre-‐negotiations
period
of
the
Kyoto
Agreement
when
the
U.S.
pushed
for
it
versus
the
carbon
tax
concept
desired
by
the
European
Union.
As
a
result,
the
EU
ETS
is
the
most
extensive
example
of
cap
and
trade
to
date.
While
cap
and
trade
variations
are
proposed,
the
core
characteristics
predominantly
remain—complexity,
discretion,
“flexibility”
and
lack
of
transparency.
III.
THE
LOW-‐
AND
MIDDLE-‐INCOME
COUNTRY
CONTEXT
FOR
CARBON
PRICING
U.S.
Policy
Analyses:
Overlooking
Low-‐
and
Middle-‐Income
Countries
Weak
Institutions
and
Corruption
There
has
been
considerable
analysis
of
the
carbon
fee
and
cap
and
trade
in
academic
institutions
[6}
and
think
tanks.
[7]
The
analyses
generally
use
criteria
for
comparative
evaluation
which
are
relevant
for
domestic
policy
debates.
The
analyses
(and
criteria)
generally
underestimate
or
fail
to
consider
the
importance
of
pursuing
a
policy
that
works
not
only
in
the
U.S.
and
Europe
but
in
low-‐
and
middle-‐income
countries
with
significant
emissions.
Context
matters.
These
differences
should
significantly
affect
the
choice
between
cap
and
trade
versus
a
carbon
fee
and
dividend.
Institutional
capacity
is
generally
weak
and
uneven
in
low-‐
and
middle-‐income
countries.
For
purposes
of
this
paper
it
is
defined
as
the
ability
of
government
©
2015
Robert
A.
Archer
4
organizations
to
exercise
authority,
carry
out
functions,
attract
and
maintain
competent
human
resources
and
work
effectively
with
other
government
entities.
“What
is
true
for
international
agreements
is
true
for
domestic
policy:
whether
governments
achieve
the
goals
they
set…mostly
depends
on
that
country’s
institutional
capacity.”
[8]
Corruption
is
a
pervasive
and
complex
element
of
the
international
development
process.
Systemic
corruption
embedded
in
existing
on-‐going
practices,
such
as
the
energy
sector,
combined
with
political
and
bureaucratic
abuse,
is
a
significant
concern
in
low-‐
and
middle-‐income
countries.
Corruption
is
compounded
by
weak
institutional
capacity.
The
energy
sector
corruption
in
countries
such
as
Ukraine,
Tanzania,
China
and
Brazil
[9,10,11,12]
is
significant,
systemic
and
has
political
consequences.
Elements
within
the
energy
sector,
the
government
and
selected
private
sector
interests
are
able
to
manipulate
the
institutions,
processes
and
financial
and
energy
flows
in
a
manner
to
establish
systemic
corruption
and
rent-‐seeking
arrangements.
In
response
to
the
view
that
corruption
is
a
“country
issue”
and
not
the
concern
of
the
international
community,
the
pro-‐active
position
of
the
World
Bank
President
Jim
Kim
is
representative
and
responsible:
“The
governance
issues
are
real.
Corruption
is
a
very
real
issue.
We
continue
to
work
in
places
where
we
know
there
is
corruption,
because
there
is
no
other
group
that
would
do
it.
So
we’ve
got
to
fight
corruption,
we’ve
got
to
do
everything
we
can
to
help
specific
countries
improve
on
their
governance.”
[13]
Institutional
capacity
and
corruption
factors
will
have
much
greater
importance
in
determining
the
appropriateness
of
a
carbon
fee
and
dividend
versus
cap
and
trade
in
low-‐
and
middle-‐income
countries
than
in
high-‐income
countries
(the
EU
and
U.S.)
as
discussed
below.
The
Low-‐
and
Middle-‐Income
Country
Context
Economic
growth
has
been
more
rapid
in
low-‐income
and
middle-‐income
countries
compared
to
high-‐income
countries.
[14]
Rapid
growth
combined
with
a
higher
energy
intensity
results
in
CO2
rates
of
emissions
that
generally
exceed
those
of
higher-‐income
countries.
©
2015
Robert
A.
Archer
5
Limited
institutional
capacity
has
been
a
serious
constraint
in
achieving
reforms
and
sustainable
development.
It
manifests
itself
in
government
organizations
that
lack
adequate
skilled
human
resources,
ineffective
organizational
structures,
inability
to
administer
and
apparent
but
not
real
authority.
Organizations
within
countries
vary
significantly
in
capacity
depending
upon
their
importance,
engagement
with
international
organizations
and
other
factors.
Generally
two
of
the
strongest
organizations
are
the
fiscal/tax
authorities
and
the
organizations
responsible
for
border
tariffs
and
trade.
Often
among
the
weaker
are
ministries
and
agencies
such
as
environment,
health,
statistics
and
energy
ministries,
with
the
energy
companies
exerting
undue
influence
and
corrupt
practices.
Significant
attention
has
been
on
the
rapid
economic
growth
and
rising
CO2
emissions
of
China
and
India.
While
this
is
understandable,
it
overlooks
a
major
block
of
predominantly
low-‐
and
middle-‐income
countries
and
how
their
characteristics
will
affect
the
implementation
of
a
carbon
fee
and
dividend
versus
cap
and
trade.
Failure
to
give
adequate
weight
to
weak
institutional
capacity
and
corruption
in
the
emerging
U.S.
and
international
debate
on
carbon
pricing
will
lessen
the
probability
of
sound
policy
choices
and
effective
CO2
reduction.
Corruption,
Governance
and
Emissions:
The
Group
of
19,
China
and
India
“Serious”
corruption
and
weak
governance
and
institutions
prevail
in
a
group
of
nineteen
countries
with
significant
and
growing
emissions.
Corruption
and
institutional
weakness
are
measured
in
the
table
below
by
the
indices
of
Transparency
International
(TI)
[15]
and
the
World
Bank
(WB)
Corruption
and
Governance
Index.
[16]
The
countries
are
in
rank
order
of
their
2013
CO2
emissions.
[17]
Table
1
shows
the
magnitude
of
the
emissions
from
the
“Group
of
19”
in
political
economies
that
are
institutionally
weak
and
with
serious
corruption.
©
2015
Robert
A.
Archer
6
TABLE
1
NINETEEN
COUNTRIES
WITH
HIGH
EMISSIONS,
“SERIOUS”
CORRUPTION
AND
INSTITUTIONAL
WEAKNESS
COUNTRY
EMISSIONS
(kt)
CORRUPTION
GOVERNANCE
AND
INDEX
CORRUPTION
INDEX
(WB)
(TI)
(WB)
Russia
1,740,776
127
45/17
Iran
571,612
144
28/28
Saudi
Arabia
464,481
63
57/61
South
Africa
460,124
72
66/54
Mexico
443,674
106
60/40
Indonesia
433,989
114
45/30
Brazil
419,754
72
51/55
Ukraine
304,805
144
30/10
Turkey
298,002
53
65/60
Thailand
295,282
102
61/49
Kazakhstan
248,729
140
35/20
Malaysia
216,804
53
82/68
Egypt
204,776
114
20/32
Venezuela
201,747
160
13/7
Argentina
180,512
106
45/41
Pakistan
161,396
127
23/28
Algeria
123,475
94
32/39
Iraq
114,667
171
15/7
Nigeria
78,910
144
16/9
TOTAL
6,963,515
China
8,286,692
80
54/47
India
2,008,823
94
50/35
Sources:
Transparency
International
(TI)
and
World
Bank
(WB)
Indices
All
countries
ranked
below
#53
on
down
to
#171
as
defined
by
the
TI
Corruption
Perception
Index
have
“serious”
corruption.
[Note:
Turkey
and
Malaysia
are
on
the
borderline
at
#53;
their
inclusion
does
not
change
the
conclusions.]
©
2015
Robert
A.
Archer
7
This
corruption
index
ranking
is
generally
consistent
with
the
World
Bank
Governance
and
Corruption
Index
scores
in
the
last
column
where
the
lower
the
score
the
weaker
the
governance
and
worse
the
corruption.
TABLE
2
CHINA,
GROUP
OF
19
AND
INDIA
CONSTITUTE
THE
MAJORITY
OF
GLOBAL
EMISSIONS
COUNTRIES
EMISSIONS
(2013)
%
OF
GLOBAL
(kt)
EMISSIONS
China
8,286,692
24.7
Group
of
19
6,963,515
20.7
India
2,008,823
6.0
Subtotal
17,259,030
51.4
U.S.
5,433,057
16.2
Rest
of
World
10,923,302
32.4
Total
33,615,389
100.0
Table
2
shows
the
significance
of
the
“Group
of
Nineteen”
CO2
emissions.
This
group
constitutes
the
second
largest
source
of
CO2
emissions
in
the
world—
ahead
of
the
United
States
and
India
and
behind
only
China.
It
is
important
to
note
that
both
China
and
India
have
significant
institutional
weakness
and
systemic
corruption
issues
as
well
as
the
Group
of
19.
(See
the
bottom
of
Table
1
for
their
scores).
Table
2
shows
that
over
50%
of
global
emissions
come
from
China,
the
Group
of
19
and
India
and
all
are
growing
faster
than
high-‐income
countries.
This
highlights
the
importance
of
encouraging
a
carbon
pricing
policy
that
is
“administration-‐lite”
and
provides
the
least
opportunity
for
corruption
and
abuse—whether
legal
or
illegal.
The
discussion
of
the
carbon
pricing
options
below
applies
not
only
to
the
Group
of
19
but
to
India
and
China
as
well
given
their
similar
characteristics.
©
2015
Robert
A.
Archer
8
IV.
CARBON
FEE
AND
DIVIDEND
VERSUS
CAP
AND
TRADE
“Reform”
Versus
Reality
Getting
acceptance
and
“formal”
adoption
of
a
carbon
pricing
policy
is
one
thing;
real
implementation
is
another,
as
shown
by
international
development
experience.
Without
effective
implementation,
carbon
emission
reductions
will
be
illusory.
There
is
widespread
experience
in
the
development
community
with
the
gap
between
adopting
policy
reforms
and
actual
implementation
in
low-‐
and
middle-‐income
countries.
An
example
is
in
the
energy
sector
where
reform
commitments
with
international
organizations
(World
Bank,
IMF)
and
donors
(EU
and
U.S.)
have
a
history
of
mixed
implementation.
For
successful
implementation
and
results,
it
is
necessary
to
consider
the
institutional
capacity
of
the
country
and
the
corruption
opportunity
risks
in
both
the
policy
and
implementation.
It
is
this
gap
between
formal
adoption
and
real
implementation
that
is
significant
in
the
comparison
of
the
carbon
fee
and
dividend
policy
and
cap
and
trade.
Implementation
of
a
carbon
fee
is
achievable;
cap
and
trade
unlikely.
Carbon
Fee
&
Dividend:
The
Best
Fit
for
Low-‐
and
Middle-‐Income
Countries
The
carbon
fee,
dividend
and
duty
policy
has
significant
advantages
over
cap
and
trade
in
low-‐
and
middle-‐income
countries
(and
high
income
countries
which
are
not
included
here).
The
economic
arguments
are
compelling,
particularly
those
relating
to
revenues,
volatility,
transparency,
and
predictability.
The
carbon
fee
and
dividend
approach
is
an
obvious
fit
in
what
is
generally
considered
the
strongest
government
organization-‐-‐the
ministries
of
finance/tax
authorities.
The
carbon
fee
and
dividend
requirements
are
fully
consistent
with
the
institutional
role
and
strengths
of
the
Ministry
of
Finance
and
revenue
authorities
which
include
tax
collection
and
disbursement
functions.
Most
importantly,
countries’
fiscal
organizations
generally
have
direct
working
arrangements
with
the
International
Monetary
Fund
(IMF).
The
IMF
provides
policy
guidance
and
assistance,
institutional
development
support
for
taxation,
budget
and
expenditures
for
its
client
countries.
This
provides
a
degree
of
assurance
that
a
carbon
fee
and
the
dividend
can
be
carried
out
effectively
and
with
a
degree
of
international
oversight.
©
2015
Robert
A.
Archer
9
Similarly,
the
carbon
duty
imposed
at
the
border
and
administered
by
countries’
border/trade
organizations
would
operate
under
the
framework
of
the
World
Trade
Organization
(WTO)
which
has
on-‐going
working
arrangements
with
all
member
countries.
The
WTO
emphasizes
transparency
and
trade
monitoring
through
surveillance
of
national
trade
policies.
This
is
a
fundamental
activity
running
throughout
the
work
of
the
WTO.
All
WTO
members
are
reviewed.
[18]
In
this
manner,
the
carbon
fee
and
dividend
differ
significantly
from
cap
and
trade
which
has
no
comprehensive
empowered
international
counterpart
for
oversight.
[Note:
such
oversight
is
beyond
the
capacity
and
authority
of
the
World
Bank.]
The
revenue-‐neutral
dividend
is
a
central
part
of
the
carbon
fee
concept.
A
steady
household
rebate
to
all
households
is
significant
for
two
reasons.
First,
it
allows
governments
to
address
one
of
the
most
significant
problems
in
energy
reform
that
plagues
low-‐
and
middle-‐income
countries:
price
reform.
The
dividend,
based
on
analyses
to
date,
will
hold
harmless
between
60%-‐80%
of
households
from
the
resulting
price
increases.
Within
this
transition,
governments
will
be
able
to
reform
price
structures
and
levels
that
impede
clean
energy
investments,
energy
efficiency
and
expanded
multilateral
donor
support.
Secondly,
the
steady
predictable
household
dividend
builds
broad-‐based
political
support
for
continuation
of
the
carbon
fee,
serves
as
a
political
guard
against
diversion
of
revenues
and
facilitates
the
overall
transition
for
all
income
levels.
It
is
important
to
note
that
this
predictability
is
not
a
characteristic
of
cap
and
trade
given
the
experience
to
date
of
widely
fluctuating
allocations
and
allowance
prices.
To
date,
the
experience
with
cap
and
trade
shows
that
revenues
fluctuate
significantly.
This
makes
the
concept
of
rebates
to
households
in
cap
and
trade
program
more
aspirational
than
achievable.
The
carbon
fee
and
dividend
has
comparative
advantage
over
cap
and
trade
in
low-‐
and
middle-‐income
countries:
Less
Administrative
Burden:
The
policy
calls
for
a
fee
on
a
limited
number
of
coal,
oil
and
gas
firms
(and
imports)
and
distribution
of
those
revenues
to
households.
This
is
a
perfect
fit
with
the
functions,
expertise
and
experience
of
the
ministries
of
finance/tax
authorities
(that
are
usually
closely
engaged
with
the
IMF).
Less
Administrative
Discretion:
The
fee
is
fixed,
escalates
annually
and
its
simplicity
allows
for
monitoring
and
verification.
Household
distribution
is
self-‐
©
2015
Robert
A.
Archer
10
Description:transparent, would reside in the strongest ministry (finance/tax authority), and provide predictable revenues for household dividends, unlike cap and
