Carbon Fee-and-Dividend System

The call for individuals to take personal action to address climate change has been made loud and clear but is it enough to leave the fate of the planet to individual conscience?

Some incentives and legislation are surely needed from government if we are to bring about the level of changes required, in the short timescales available, to limit the impact of climate change.


The single most effective policy led initiative would perhaps be the introduction of a carbon fee-and-dividend system, to both accelerate and ease the transition away from fossil fuels.

Fossil fuels continue to provide most of our energy because they provide the cheapest energy. This is in part due to their high energy density and the existing infrastructure that has grown up around fossil fuel use, but they are also cheapest because we do not take into account their true cost to society, in terms of air and water pollution and their impact on human health, borne by the public. Damages from climate change will also falling on the public, but they will be borne especially by generations to come rather than today's population.


To fix the problem low-carbon energy needs to be made cheaper than fossil fuel based options, and there is a scientific and economic consensus that a carbon fee-and-dividend system is the single most effective tool for the transition.

What is a carbon fee-and-dividend system?


In simple terms this is a tax levied on carbon-based fuels (coal, oil, gas), which can be returned to the public by way of regular energy dividends, paid directly to citizens. It has the potential to incentivise a shift to low-carbon energy, while protecting consumers from any increases in the cost of carbon-based fuels.

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On Site Gas Production
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Open cast coal mining
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Container ship in port
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In practice a fee would be levied on fuels at their point of origin into the economy, such as the well, mine, or port of entry, based upon the carbon content of a given fuel that would be emitted once the fuel is burned. The fee would be progressively increased, providing a steady, predictable price signal and incentivise early transition to low-carbon energy sources and products.

Accounting for the true cost of fossil fuel emissions not only creates a level-playing field for all sources of energy, but also informs consumers of the true cost comparison of various fuels when making purchase decisions.

A border tax adjustment would be levied on imports from nations that lack their own equivalent fee on carbon. For example, if one country created a carbon fee-and-dividend system, exporters would face the choice of paying carbon fees to that country or creating its own internal carbon pricing system. This would leverage global economic power to incentivise carbon pricing around the world.

Some or all of the fee would be returned to households as an energy dividend. Returning 100% of net fees results in a revenue-neutral carbon fee-and-dividend system. This revenue neutrality is very appealing to governments who want to reduce emissions without increasing the size and funding of government. The level of carbon fee would be set so that most people would receive more in the dividend than they are paying out for the carbon fee element of their fossil fuel purchases. And in order to maximize effectiveness, the amount of the fee would be regulated based on the scientific assessments from both economic and climate science in order to balance the size and speed of fee progression.


This is possible and already happening. Canada has passed a carbon tax that will give most Canadians more money. The UK’s Policy Exchange think tank is promoting the concept.

So, while we can all do something positive to reduce our carbon emissions, by changing our lifestyles, we must also take actions to lobby our politicians, particularly our MPs, to introduce effective policies and systems that can lead to rapid, impactful global results. 

Hear what renowned climate scientist Dr James Hansen has to say about climate change and the impact that a carbon fee-and-dividend system could have.