Climate Dividend—the exponential way forward in emission pricing

by Nick Beglinger, Cleantech21 Foundation

With contributions from Joseph Robertson, Citizens’ Climate Lobby, and reviewed by Lea Trogrlic, Economists for Future

March 2019 / Update March 2020

ABSTRACT: Climate action is urgent. To keep global warming below 1.5ºC, exponential progress is needed—including both technological and regulatory innovation. For the latter, the pricing of all emissions is key. Putting a price on global warming pollution provides the right incentives to the mainstream of market participants. However, a 1.5ºC-compatible pricing strategy will not be achieved by ‘more of the same’, but actually requires a paradigm shift on how to price emissions. A sober analysis of achievements to date, the likely future roll-out potential of current approaches, as well as the latest findings on communication and competitiveness issues, indicate that neither point-of-consumption emission taxes nor emissions trading systems will lead to the necessary exponential decarbonization. According to this analysis, Climate Dividend Frameworks (CDFs), collecting an incentive fee on all GHG emissions at source, and redistributing income back to households, on the other hand, show great potential regarding all critical emission pricing success metrics. The advantages of CDFs are their simplicity, the fact that they avoid dissuasive policy discussions on the use of funds, and their salient income distribution effect. In order to make the most of the CDF opportunity, this ‘third way’ of pricing emissions should be systematically advanced with a dedicated international advocacy body, making available resources to conduct and coordinate relevant research and to ensure the delivery of use-case insights to policy-makers.

The following is an adapted excerpt of the complete Climate Dividend Whitepaper. For the full whitepaper, go to: http://ctzn.earth/cdiv-wp

The need for exponential climate action and regulation, now

The Intergovernmental Panel on Climate Change Special Report on Global Warming of 1.5ºC makes it clear for all of us: We must go a lot “further” and a lot “faster” to reach the temperature target set in the Paris Agreement . Specifically, we need to reverse GHG emission curves downwards no later than 2020 , then halve emissions globally every decade, and hit net-zero by 2050. In other words, we need ‘exponential’ decarbonization progress, requiring ‘exponential’ (aka ‘disruptive’, ‘system- level’) regulatory, business and technological innovation. Regulatory innovation is needed to set the right framework to develop business process and technology innovation reaching the required targets for a fast decarbonisation.

When we look at the past two decades of climate negotiations and actions in the aftermath of COP24, there is no other way but to recognize that the emission reductions achieved in the past have been far from ‘exponential’. The current level of climate action is still a long way from where it needs to be, which is also clearly evidenced in the recent surge in global emissions, having reached a historic high in 2018.

Looking ahead, it becomes clear that the need for decarbonization is not yet sufficiently recognized by the market at large. All of this leads to a sobering conclusion:

Our approach to addressing decarbonization must change, fundamentally. Emissions must decrease now, and not just at incremental, but at exponential pace. In order to avert the catastrophic damages, and given the science-base, we have 30 years left to reach ‘net-zero’.

In order to initiate this rapid decarbonization, the market needs to receive a strong signal to be able to act accordingly.

We need to put the right price on all emissions, it’s that simple.

As price-mechanisms have a crucial role in shaping the market, putting a price on carbon, and other greenhouse gas emissions (GHG), is one of the key, if not the key, climate action strategy we are obliged to adopt for standing a chance to reach net-zero emissions by 2050 . This unique policy opportunity of pricing emissions is, and has been, understood and documented by a large number of significant public and private stakeholders and represents the informed consensus of economic experts. It is a policy option that, as of 2018, is featured in the Nationally Determined Contributions (NDCs) of 88 countries (‘emission trading within or across borders, international crediting, carbon taxation, and other measures’).

Emission pricing is fair and follows the polluter pays principles—and it is considered to be crucial for ensuring a “smooth transition towards a low-carbon economy”. Emission pricing is also at the core of the work for which William Nordhaus and Paul Romer have been awarded the 2018 Nobel Prize in Economics.

How to price GHG emissions?

Traditionally, two main emission pricing instrument options are considered:

  1. Taxing emissions (a ‘tax’, as a price-based instrument) or
  2. setting emission caps and establishing emissions trading systems (an ‘ETS’, as a quantity-based instrument).

Most significant stakeholders generally claim that ‘both tax and ETS are important’. They mostly abstain from voicing clear preferences on the ‘how’ of pricing emissions – referring to different national circumstances (political, economic, and social), and hence the need to somehow progress on all types of pricing.

In practical reality, however, and for much of the past decade28, ETS has received considerably more attention than tax. Unofficially, at least until very recently, ETS was the favoured option for many of the relevant emission pricing decision makers.

Climate Dividend—the third and best pricing option

Based on the necessary level of ambition, track record to date, pricing performance criteria, and the drivers of political feasibility, an efficient emission pricing policy can be defined. And in fact, one policy stands out with respect to all key criteria. It entails an ‘incentive fee’ collected on all GHG emissions, and an equal/regular redistribution of all income thereby generated back to households. It shall be termed ‘Climate Dividend’ emission pricing, i.e. the ‘Climate Dividend Framework (CDF)’.

CDFs have been applied in some countries already (such as in Switzerland and Canada), and currently receive increasing attention because of prominent CDF efforts in the United States (CLC, and CCL as per textbox below) as well as the limited progress achieved with both tax and ETS-based pricing to date. The key advantage of a CDF is its simplicity and effectiveness (leveraging all the strengths of tax-based approaches) but scoring much better on political feasibility (even better than ETS).

CDFs not only meet all 6 of the FASTER Principles:

  • 1. Fairness
  • 2. Alignment of Policies and Objectives
  • 3. Stability & Predictability
  • 4. Transparency
  • 5. Efficiency and Cost-Effectiveness
  • 6. Reliability and Environmental Integrity

CDFs also bring 4 more specific practical and political virtues:

  • 7. Fair use of revenues
  • 8. Simplicity
  • 9. Adjustable between borders and between businesses in value chains
  • 10. Relevance regarding negative emission schemes

Making Climate Dividends real

In the light of the urgency for action and the apparent potential of CDFs for exponential decarbonisation, the main objective of this whitepaper is to provide the basis for a concerted, international effort with the goal to promote and support the fast implementation of CDFs globally.

The International Climate Dividend Alliance (ICDA) shall be a not-for-profit, multilateral advocacy body and partnership organization, including foundations, other advocacy organizations, businesses, governments, universities, and international organizations. ICDA shall unite existing national advocacy efforts, such as those of Citizens Climate Lobby (CCL) in the US (see text box below), as well as others such as the ‘Australian Climate Dividend Plan (ACDP)’ .

As of February 2020, ICDA benefits from the financial support of the Swiss Federal Office for the Environment (FOEN).

ICDA shall position CDF as the third and best emission pricing policy option (given decarbonization scale and timeframe), support its implementation through national climate action plans (the ‘NDCs’ driving Paris Agreement implementation), and thereby accelerate the transition to zero-emission technologies and practices in all economic sectors while not leaving anyone behind.

ICDA shall be politically neutral and position CDFs as the ‘pragmatic and effective’ climate policy, beyond left/right politics—practically enabling exponential decarbonization, in line with the Paris Agreement and the need to achieve net-zero emissions by 2050.

  • Read the full Climate Dividend Whitepaper at: http://ctzn.earth/cdiv-wp
  • Visit our About page for up-to-date information on the mission, composition, and ongoing work of the International Climate Dividend Alliance.