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Climate Dividend – the exponential way forward in emission pricing

Nick Beglinger, Cleantech21 Foundation with contributions from Joseph Robertson, Citizens’ Climate Lobby

March 2019

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 1.5C-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.

1. The need for exponential climate action, now __________________________________ 2

2. Addressing climate challenges with disruptive technology, and disruptive regulation __ 3

3. We need to put the right price on all emissions, it’s that simple ___________________ 4

4. How to price GHG emissions? Revisiting tax vs ETS ______________________________ 6

5. Performance criteria for exponential emission pricing __________________________ 10

6. Climate Dividend, the third and best pricing option ____________________________ 11

7. Making Climate Dividends real _____________________________________________ 15

ABOUT THE AUTHOR

Nick Beglinger is the CEO of Cleantech21 (C21, @NickBeglinger), an independent, Swiss not-for-profit foundation operating since 2008. C21 has launched Switzerland’s first green business association and was one of the first to address the potential of fourth industrial revolution technology for climate action with organizations such as UNFCCC and the World Bank in 2016. C21 is the initiator of the government-funded Climate Ledger Initiative (CLI) and the private-sector #Hack4Climate innovation

program, as well as a co-founder of the Climate Chain Coalition (CCC)

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1. The need for exponential climate action, now

IPCC’s SR15 report1 makes it clear for all of us: We must go a lot ‘further’ and a lot ‘faster’2 to reach the

temperature target set in the Paris Agreement3. Specifically, we need to reverse GHG emission curves

downwards no later than 20204, then halve emissions globally every decade5, and hit net-zero by 20506. In

other words, we need ‘exponential’ decarbonization progress, requiring ‘exponential’ (aka ‘disruptive’, ‘system-

level’) regulatory and technological innovation.

When we look at the past two decades of climate negotiations and actions in the aftermath of COP247, 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 an all-time high in 20188.

Looking ahead, it becomes clear that the need for decarbonization is not yet sufficiently recognized by the

market at large. The demand for oil continues to rise globally, and fossil majors continue to invest heavily in

order to meet this increasing demand9, even as the evidence of climate-related damages strengthens10 and

global warming pollution is increasingly linked to legal liability11.

Together, this must lead us 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’.

Source: IPCC SR15 10/2018

1 ‘Special Report on Global Warming of 1.5C’, IPCC, 08/10/2018, http://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf 2 As per the motto of COP23, https://skew.engagement-global.de/further-faster-together.html 3 ‘Keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to

pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius’, https://bit.ly/2EVSoXT 4 Mission 2020, http://mission2020.global 5 Exponential Roadmap, http://exponentialroadmap.futureearth.org/ 6 ‘Special Report on Global Warming of 1.5C’, IPCC, 08/10/2018, https://bit.ly/2y7hz9b 7 UNFCCC’s 24th annual COP climate conference, COP24 in Katowice/Poland, 03-14/12/2018, http://cop24.gov.pl/ 8 ‘Brutal news, global carbon emissions jump to all -time high in 2018’, Damien Carrington, The Guardian, 05/12/2018, https://bit.ly/2PlUAx8 9 ‘The truth about big oil and climate change’, The Economist, 09/02/2019, https://econ.st/2GxmXr5 10 Exemplary source: Munich RE, https://bit.ly/2Vn0jWI 11 ‘Climate change litigation: A new class of action’, Mark Clark et.al., 11/2018, https://bit.ly/2GMud3m

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2. Addressing climate challenges with disruptive technology, and disruptive regulation

Fortunately, we are at the cusp of the Fourth Industrial Revolution12: a disruptive set of new technologies that

puts unprecedented innovation power at our disposal. Particularly the ‘troika’ of the Internet of Things (IoT),

Distributed Ledger Technologies (DLT, including the ‘Blockchain’), and Artificial Intelligence (AI), offers

significant potential with respect to more ambitious climate action13. These digital opportunities come in

addition to and in support of the already startling innovation observed in many domains with direct climate

relevance (from energy with solar panels or batteries, to mobility with electric vehicles or inter-modal services).

The combined innovation force should give us hope and direction. It can, indeed, be disruptive and thus

contribute significantly to the ‘exponential’ progress needed.

The new technologies can build trust among equal stakeholders, bring transparency and accuracy to MRV14,

enable automation, performance-based payments, securely link and incentivize diverse stakeholders. If and

how such advantages can materialize in real world conditions, however, depends on both technological and

regulatory innovation. And for exponential climate action, both need to be in sync15.

With the wrong incentives in place, or simply a lack of clear framework conditions incentivizing sustainable

development, high-tech may even lead to higher-emission, and thus potentially increase pressure on climate.

Outdated regulatory frameworks may keep technological and business process innovation from entering the

market and hence there is no tangible climate action taking place16. Moreover, a mismatch may lead to legal

uncertainties and potential risks in areas such as investor protection, data privacy, etc. Looking at the rate of

technological change ahead, a sound regulatory approach must also leave space for technological innovations

to develop rapidly, and thus abstain from complex and broad interventions, leading to administrative and

opportunity costs. On the other hand, regulative measures must be strong and effective so that they translate

into clear market signals for all stakeholders (the mainstream), and such that decarbonization targets are met.

In summary: Innovation must be allowed to ‘run free’, but also needs to be incentivized towards the right

targets. Today’s debate can no longer be ‘market vs. regulation’, but rather a concerted effort towards the right

combination of both.

Only in combination will exponential technological and regulatory innovation bring us to where we need to be,

in 30 years. There have been some striking innovation success stories, concerning technology (e.g. the efficiency

gains in Photovoltaics, ‘PV’) and regulation (e.g. the original feed-in tariffs leading to rapid scale-up in PV

deployment, and thus the experienced efficiency gains). In the aggregate, however, this has been far from

sufficient and will require new and disruptive approaches.

12 Exemplary source: World Economic Forum (WEF), https://bit.ly/2jGUzJI 13 See white paper by Cleantech21 Foundation, ‘A Climate-Innovation Perspective on the Fourth Industrial Revolution’, 10/2018, https://bit.ly/2Rw2F44 14 One example relating to Methane emissions, ‘How technology is leading us to new climate change solutions’, Fred Krupp, World Economic Forum, 29/08/2018, https://bit.ly/2FOIAom 15 See, for example, ‘Better regulations for innovation’, European Commission, Working Document 2016, https://ec.europa.eu/research/innovation-union/pdf/innovrefit_staff_working_document.pdf 16 At the climate/DLT intersection, this is one of the key focus areas of the Climate Ledger Initiative, relating to research, awareness raising, and capacity building.

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

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 205017. 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 experts18. 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’)19.

Emission pricing is fair and follows the polluter pays principles20 – and it is considered to be crucial for ensuring

a ‘smooth transition towards a low-carbon economy’21. 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 Economics22.

It is increasingly acknowledged that climate mitigation, adaptation and financing costs differ across nations,

and that consequentially various meaningful and appropriate national prices, instead of one single global price,

appear to be the best way forward. Mainly thanks to the work of the ‘High-Level Commission on Carbon Prices’,

however, the ‘science-based’ average global pricing levels necessary to achieve the temperature target of the

Paris Agreement are known and can serve as a guidance to national policy makers: USD40-80 and USD50-100

per tCO2e are needed by 2020 and 2030, respectively23.

The specific economic impacts of pricing emissions are increasingly documented, and the empirical evidence is

growing24. According to several sources of high regard, effective mitigation action is much less costly than the

expected damages caused by climate change – on a global level. One such source estimates that well over 90%

of world GDP would be negatively affected, and that investing into reaching 1.5C vs. 2.0C would yield returns

of a factor of 6025. While emission pricing will have negative effects on some sectors and households, there are

policy options available to alleviate these.

It is thus safe to conclude that the ‘if-question’ on emission pricing is indeed answered. But what about the

‘how’? With currently only around 15% of global emissions covered by an explicit price26, and with most current

price levels significantly lower than they should be27, it is fair to conclude that we are not where we should be

in terms of our emission pricing ambition. Even among OECD countries, only 25% of GHG emissions are currently

priced at a level of USD30 per tCO2e or higher – a shockingly low price-benchmark28.

17 ‘Report of the High-Level Commission on Carbon Pricing (HLCR)’, 29/05/2017, https://bit.ly/2fJd4fg 18 For Example: Carbon Pricing Leadership Coalition (CPLC, hosted by the World Bank), We Mean Business (https://www.wemeanbusinesscoalition.org/commitment/put-a-price-on-carbon/), several others 19 CPLC Research Conference, 14-15 February 2019, New Delhi, Conference Agenda (accessed 13/02/2019), https://bit.ly/2UW70Pm 20 Polluter Pays Principle, originating in the nineteenth century and adopted as part of 1992 Rio Conference, https://en.wikipedia.org/wiki/Polluter_pays_principle 21 ‘Effective Carbon Rates 2018’, OECD, https://bit.ly/2DgIQdr 22 ‘2018 Nobel in Economics Is Awarded to William Nordhaus and Paul Romer’, Binyamin Appelbaum, New York Times, 08/10/2018, https://www.nytimes.com/2018/10/08/business/economic-science-nobel-prize.html 23 High-Level Commission on Carbon Prices, 29/05/2017, https://bit.ly/2fJd4fg 24 Columbia University 07/2018, https://bit.ly/2SoXHe5 and CPLC Research Conference https://bit.ly/2A74ZaX 25 ‘Hitting toughest climate target will save world $30tn in damages, analysis shows’, The Guardian, 23/05/2018, referring to Yale Study, https://bit.ly/2s3b44f 26 State & Trends of Carbon Pricing 2017 & 2018 (World Bank), https://bit.ly/2PNeamT, https://bit.ly/2MlwX75 27 75% of all emissions covered by carbon pricing are priced below USD10, https://bit.ly/2PNeamT 28 ‘Effective Carbon Rates 2018’, OECD, https://bit.ly/2zk0zfD

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Pricing progress has been made, but it is far from being ‘exponential’. Extrapolating from the current pace of

development, both in terms of global coverage and price levels, it becomes obvious that an actual emission

pricing paradigm shift is necessary to make it the key enabler of the Paris temperature target that it needs to

be29. For this to happen, on the one hand, emission pricing needs to move from an optional, to a mandatory

element of future-proof economic policy making, applied at science-based price levels. On the other hand, the

‘how’-debate has to become much more vigorous and determined, such that improved pricing options can be

defined and globally implemented, in the 30-year opportunity time window that we still have available.

29 This is also the conclusion when analyzing ‘carbon productivity’ (GDP per ton of CO2), which has improved just 1.4% annually for the period 2000-2016 on average. McKinsey & Company estimated, that such annual improvement however, would need to be approx. 6% until 2050. Exemplary source: ‘A six point plan to building a new carbon economy’, Fast Company, 14/09/2018, https://bit.ly/2Gvo4sj

Image: Cartoon by Greg Perry, The Toronto Star

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4. How to price GHG emissions? Revisiting tax vs ETS

Traditionally, two main emission pricing instrument options are considered: Taxing emissions (a ‘tax’, as a price-

based instrument) vs. 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’30. 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 decade31, ETS has received considerably more attention

than tax32. Unofficially, at least until very recently, ETS was the favoured option for many of the relevant

emission pricing decision makers. On the one hand, organizations such as the World Bank seem to recognize

advantages of tax over ETS: “a carbon tax system is more practical to implement, monitor and enforce than

tradable permit-based approaches to global climate-change action”, “a tax-based system will be more

transparent and offer the appropriate incentives for participation and compliance”33. On the other hand,

however, the Bank’s practical implementation focus seems to emphasize ETS. A recent example is the agenda

of their own ‘innovate4climate’ conference in 201834 – with five program elements on ETS, and none on tax.

There could be different reasons for the observed ETS bias:

• ETS is viewed as more ‘business friendly’ (despite the fact that its administrative costs actually appear

to be higher than for well-designed tax-based systems, and despite the lower price-visibility);

• ‘Market’, ‘certificates’, and ’allowances’ sound better than ‘tax’ (which may be useful for some

business audiences, but ETS sounds complex and is difficult to understand for the average voter);

• The political hurdles for implementing a policy that excludes many emitters but includes free

allowances and a long-term ramp-up, are deemed to be lower than for introducing a new tax35

(although this may change in the light of steadily rising costs of inaction and growing urgency);

• ‘Tax’ is generally not interpreted in the same way by different stakeholders (leading to uncertainties

and misunderstandings);

• ETS is regarded to offer ‘compliance and policy flexibility’ advantages36 (although transparency,

visibility, and policy-stability are increasingly viewed as the relevant quality attributes of policy

instruments that shall be net-zero compatible);

• Stakeholders are influenced by organizations such as the International Emissions Trading Association

(IETA), with the specific mission to promote ETS – while there is no international multistakeholder

body advocating a ‘tax agenda’;

• There is political manoeuvring around tax, using it as a bargaining chip to avoid other regulatory

measures (such as law suits37).

30 In the context of Cleantech21’s early partnership with CPLC, participations in COP delegations, interviews, etc. 31 Exemplary source: ‘Cap and Trade v Taxes, Climate Policy Memo #1’ C2ES (Center for Climate and Policy Solutions”), 03/2009, https://www.c2es.org/document/cap-and-trade-vs-taxes/ 32 Exemplary source: ‘Tracking global carbon revenues: A survey of carbon taxes versus cap-and-trade in the real world’, Jeremy Carl & David Fedor, 23/05/2016, https://bit.ly/2SGWxKb 33 Accessed 07/11/2018, https://openknowledge.worldbank.org/handle/10986/11147 34 Accessed 07/11/2018, http://www.innovate4climate.com/en/agenda-2018 35 A view shared, for example, by David Attenborough, who stated at the World Economic Forum 2019: “If people can truly understand what is at stake, I believe they will give permission for business and governments to get on with the practical solutions”, https://bit.ly/2UaFCNh 36 IETA website (visited 19/10/2018), https://www.ieta.org/Three-Minute-Briefings/3879022 37 E.g. Exxon joining Americans for Carbon Dividend, https://www.afcd.org/

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The quantitative evidence38 on tax vs. ETS is not straight forward – not least because of the low price-levels

discussed earlier. A close examination, nevertheless, speaks a clear language. As per the table below, taxes

today are much more significant drivers of emission pricing than ETS in all but one sector (Electricity, in which

carbon price levels are low). In 2018, taxes accounted for 89% of ‘effective carbon rates’ (measuring both price

level and overall share of emissions covered) in the 42 OECD countries. ETS is only responsible for 11%, up from

6% in 2015 (with the steep jump due to the only partially completed implementation of China’s ETS pilot)39.

Source: Analysis by C21, based on OECD data provided in ‘Effective Carbon Rates 2018’)

In evaluating a scheme, its readiness for international linking must be regarded as being important — to avoid

emission leakage and assure that leaders rather than laggards are incentivized/rewarded. Unlike for the linking

of markets (for which there are several dedicated initiatives, many studies and consultancies), there is hardly

any high-profile work on linking tax policies in two or more jurisdictions. The crucial issue of adjusting at

borders, pertaining to both ETS and tax, seems somehow avoided in the case of the latter. Those few references

to tax-based linking that do exist (usually as add-ons in ETS reports) seem rather rudimentary40. This also

surprises in the light of some governments still subsidizing fossil fuels, and that the linking logic could fairly

include negative prices (i.e. incentivise fossil fuel subsidies’ reforms41).

To our astonishment when researching for this paper, even experienced UNFCCC negotiators and secretariat

members had conflicting views regarding if and how tax-based emission pricing measures, including the

international linking of these, would fit into the Paris Agreement and the emerging ‘Rulebook’42. Whereas

everyone seems to be clear that Art 6.2 relates to ‘linking markets’, including the linking of national ETS, no one

is quite sure if and where taxes fit in. This apparent lack of attention on taxes at UN level is sometimes argued

to be due to ‘taxes being national instruments, outside of the influence of international frameworks’. But this

38 ‘Carbon Taxes and greenhouse gas emission trading systems: What have we learnt?’ Erik Haites, Climate Policy, 24/04/2018, https://bit.ly/2NZ1Eip 39 ‘Effective Carbon Rates 2018’, OECD https://bit.ly/2yMQM2q 40 Exemplary source: ‘Carbon Market Clubs’, World Bank, 07/2016, https://bit.ly/2R5qGOD, concluding: “The possibility of the creation of a club of countries with a minimum per ton carbon tax needs to be explored further. How likely is such a development? Among what countries? What would the ‘club propositions’ be? With what consequences for CMCs?” The questions seem justified but also demonstrate a low level of attention. 41 As, for example, targeted by the ‘Friends of Fossil Fuel Subsidies Reforms’ (https://bit.ly/2URndVT), or suggested as part of trade agreements in more vigor, e.g. by Climate Strategies (https://bit.ly/2z9lZzz). 42 Part of the ‘Paris Agreement Work Program’, https://bit.ly/2RaODEz

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hardly makes sense, as both ETS and taxes require national policy efforts – and because the Paris Agreement is

specifically designed to integrate various differing national actions into a common international framework.

As the critical evaluation of taxes and ETS in the table overleaf summarizes, both don’t excel, neither in terms

of track, nor future potential. Qualitative and quantitative comparison is clearly favourable to tax (at least by a

factor of 5). If a tax is levied upstream, different from ETS, much less reporting infrastructure has to be in place.

It can thus be implemented and operated at much greater efficiency than consumption-tax or ETS frameworks.

Such an ‘at source’ pricing approach can in fact be viewed as capturing, with very little effort, emissions ‘at the

molecular level’43 (e.g. on import/refining in the case of fossil fuels).

The main challenge of tax instruments is believed to be their political feasibility44. And indeed, many tax

initiatives have failed at the ballot, in parliaments and commissions45. Growing urgency for climate action (incl.

the growing damages from extreme weather events) may start to facilitate implementation, but the recent loss

at the ballot in Washington State, despite its experience with extreme

weather, is a reminder of how difficult ‘tax’ still is for some constituencies.

Claims that ETS ‘deliver environmental objectives at the lowest cost to the

economy’46 are not well supported. The main challenges of ETS are believed

to be its administrative complexity and the transaction costs for market

participants. In the light of our exponential decarbonization target, the

members of the High-Level Commission on Carbon Prices are right to point

out that “a carbon tax (…) is simpler and quicker to implement than ETS”47.

Getting an ETS to work is difficult even in the context of the most advanced

economies (EU, Japan, California, etc). The idea of exporting these complex

schemes to emerging markets is therefore at least questionable48. The more speed counts (and it indeed does),

the more simplicity seems to be important too49. From a corporate or private citizen’s perspective, complexity

is a big issue. It leads to low visibility and high administrative costs, and it is difficult to clearly

explain/communicate.

Tax vs. ETS must not be an either-or question, and indeed several of the current emission pricing leaders

among nations, price emissions with combined policies50. While key stakeholders keep pointing out that ‘no

one size fits all’51, it is argued here that the necessary pricing paradigm shift to net-zero does indeed demands

instrument focus. The right strategy in the opinion of this author is thus to identify and implement the simple

and effective policy tool that would actually be able to deliver the exponential progress we depend on. If the

only choice would be between tax and ETS, the former, and not the latter, based on all the available evidence,

43 A term coined by Rodolfo Lacy, Environment Director, OECD, https://bit.ly/2XxEOUS 44 ‘How can we make carbon pricing work’, C. Hepburn & D. Klenert, WEF, 03/08/2018, https://bit.ly/2UQICi9 45 Exemplary source: ‘Carbon tax or cap and trade – Which system works best’, Karen Graham, Digital Journal, 15/11/2018, https://bit.ly/2N8fNer 46 IETA, website visited 19/10/2018, https://www.ieta.org/Three-Minute-Briefings/3879022 47 HLCR, p13, https://bit.ly/2fJd4fg 48 There are many ongoing efforts, such as in the World Bank’s ‘Networked Carbon Markets’ initiative (https://bit.ly/1y415Yu) that actively promote the implementation of ETS schemes internationally. 49 Exemplary source: ’Getting innovation timing right’, Nicolas Bry, 01/07/2011, Word Press, https://bit.ly/2IitHfd 50 Switzerland, UK and Canada are examples of countries that show how carbon taxes and ETS co-exist. Exemplary source: ‘UK freezes CO2 tax for power generation until 2021’, S&P Global, 30/10/2018, https://bit.ly/2qoHdSs 51 ‘How can we make carbon pricing work’, C. Hepburn & D. Klenert, WEF, 03/08/2018, https://bit.ly/2UQICi9

“If countries agree to a carbon

tax and it’s real and it’s not

super watered-down and weak,

we could see a transition [to

clean energy] that has a 15- to

20-year time frame as opposed

to a 40- or 50-year time frame.”

Elon Musk

Paris Sorbonne, 12/2015

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would need to be the one to focus on52. Luckily, a more thorough analysis of emission pricing performance

criteria reveals a third option – combining the advantages of an upstream tax, with the ‘business friendliness’

of ETS, and much-improved political clout.

Table: Critical Evaluation of Emission Pricing Performance to Date – Tax vs. ETS

Metric/Performance Emission Taxes (Tax) Emissions Trading Systems (ETS)

Practical Workings Tax rate set on all or selected GHG emissions

(at source or consumption level, with different

use of funds options of income generated)

Capped amount of emissions, generally only

involving selected large emitters/industries

(differing use of allowance-auction income)

Use of Revenues Unclear/open (hence subject to political debate

and often reason for non-adoption)

Unclear/open (but generally much less revenue

and much less focus on its use)

Common Classification,

Regulatory Approach

Commonly referred to as 'non-market based'

(noting that tax actually makes it easier than ETS

to reach all emitters, i.e. move all 'the market')

Commonly referred to as 'market-based'

(noting that government sets key terms - and that

it practically reaches only parts of 'the market')

Operational Track Mixed (implemented schemes work, but remain

subject to political change – new ones are tough

to implement)

Very Mixed (lengthy test periods/ramp-up, prices

too low, remain subject to political change,

complex supporting measures, floor prices, etc)

Complexity/Design

(Com., Implementation)

Relatively simple & straight forward (if levied at

source, depending design/implementation)

Relatively complex & abstract (hard to understand

and see-through for non-experts)

Transparency High (tax rate, gradually increased over time) Low (complex processes, fluctuating pricing)

Price Stability, Visibility Higher (but exposed to political uncertainties) Lower (uncertainties are economic & political)

Transaction Costs,

Reporting Infrastructure

Low

(very efficient, particularly if applied up-stream)

High

(auctions, certificates, reporting & administration)

Potential of Misuse Lower (more simple, transparent) Higher (certificates, trading, free-allocations, etc)

Reach Potential Large (all emissions, all emitters) Limited (selected emissions, large emitters – else

transaction costs become to high)

Political Feasibility Lower, given that it is a 'tax'

(considered the key challenge)

Higher, as it is considered a 'market-friendly’ (but

communicating complexity is a challenge)

Implemented Schemes53 26 25

Share of ECR (OECD)54 89% 11%

Multilateral Efforts Strong but with limited efficiency (dependent

on politics, no relevant advocacy body)

Very strong, incl. private sector involvement

(IETA & others run a 'market agenda')

Intern. Linking Efforts No relevant organization Several activities, incl. NCM initiative, IETA, etc.

Linking Complexity Lower (fixed prices, higher transparency) Higher (fluctuating prices, MRV challenges, etc)

Paris Agreement

Compatibility

Unclear (Art. 6.8.?) More clear (Art. 6.2 & 6.4, but yet no conclusion

was reached at COP2455)

Source: Author’s own analysis

52 This should be seen in parallel to the development of ‘carbon markets’ in the sense of ITMOs (as per the Paris Agreement). ITMOs may serve well as cross-border, project-specific mitigation action between stakeholders for voluntary efforts. These should be seen as additional to regulatory frameworks with national emission pricing. 53 ‘State and Trends of Carbon Pricing 2018’, World Bank, https://bit.ly/2MlwX75 54 Calculation based on data from OECD, pertaining to the 42 OECD countries as a group, ‘Effective Carbon Rates 2018’, https://bit.ly/2DgIQdr. Figures indicated are 2018 estimates. Values for 2015 are 94% (tax), 6% (ETS). 55 Exemplary source: ‘COP24: Key outcomes agreed at the UN climate conference in Katowice’, Carbon Brief, 17/12/2018, https://bit.ly/2rE6t83

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5. Performance criteria for exponential emission pricing

The FASTER Principles were established as part of a cooperation between the OECD and the World Bank in

201556 for defining performance criteria of emission pricing schemes. These can be summarized as follows:

1. Fairness (reflection of the ‘polluter pays principle’, equitable distribution of costs and benefits,

avoiding disproportionate burdens on vulnerable groups);

2. Alignment of Policies and Objectives (part of a suite of measures that facilitate competition and

openness, assuring equal opportunities for low carbon alternatives, interacting with a broader set of

climate and non-climate policies);

3. Stability & Predictability (part of a stable policy framework offering consistent,

credible and strong investment signals, with increasing intensity of time);

4. Transparency (clear in design and implementation);

5. Efficiency and Cost-Effectiveness (improving economic efficiency and reducing

the costs of emission reductions);

6. Reliability and Environmental Integrity (resulting in measurable reductions in

environmentally harmful behaviour).

In the light of the needed emission pricing paradigm shift, the FASTER Principles may be extended/clarified:

7. Fair use of revenues (what specifically happens with income must be regarded as key to any pricing

scheme, as it is vital for political acceptance and just transition in general57);

8. Simplicity (for transparency and thus for communication-potential/understanding of voters/decisions

makers, as well as for fast implementation);

9. Adjustable between borders and between businesses in value chains (avoiding emission leakage,

avoiding double counting, rewarding emission pricing leaders rather than laggards);

10. Also catering to negative emission schemes (given their growing role for achieving net-zero by 2050).

Given our objective of achieving exponential decarbonization and the need to reach net-zero emissions by 2050,

a pricing approach must stand political chances nationally, and show realistic potential for rapid global scale-

up. 30 years is very little for a global roll-out, including political processes and technical implementation. The

political feasibility of emission pricing schemes, in particular, deserves a lot more attention, at national and

international levels58. In this respect, the recent Carbon Pricing Leadership Coalition (CPLC) initiative focused

on communicating emission pricing must be seen as very timely59.

Analysis of emission pricing policy developments shows political feasibility as being highly dependent on

whether a particular scheme can be successfully communicated to decision-makers (both policy makers and

voters). In summary, the communication-analysis suggests that support for emission pricing may differ greatly

among constituencies, but is primarily driven by three main factors:

1. Fairness (all emissions priced, all emitters covered, and a fair use of revenues);

2. Simplicity (and thus understanding of the scheme, facilitating communication options);

3. Transparency (and thus trust on the use of funds as well as stakeholders’ incentives to participate).

56 ‘The FASTER Principles for Successful Carbon Pricing (an approach based on initial experience)’, 09/2015, by OECD and World Bank, https://bit.ly/2RJiTGN 57 CPLC, Conference Call on Communicating Carbon Pricing: “Trust and fairness are key”, George Marshall, CEO Climate Outreach, min. 07:30, https://bit.ly/2GP4vKH 58 ‘The economics – and politics – of carbon pricing’, The Brookings Institute, 25/10/2018, https://brook.gs/2Ojvhvb 59 ‘Guide to Communicating Carbon Pricing’, CPLC, 12/2018, https://bit.ly/2KWS3bT

“We cannot solve

problems by using the

same kind of thinking

we used when

creating them“

Albert Einstein

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6. 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’60 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 Switzerland61 and Canada62), and currently receive

increasing attention because of a prominent CDF effort in the United States (see textbox below)63 as well as the

limited progress achieved with both tax and ETS-based pricing to date64. 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). This is an evaluation of CDF, based on the extended FASTER principles

introduced previously:

1. Fairness

• CDF is very fair and strictly adheres to the ‘polluter pays principle’;

• There should be no exceptions regarding sectors, and emission types;

2. Alignment of Policies and Objectives

• An important feature of CDF is its ‘independence’ from other policies;

• It can and should be implemented, as a pragmatic ‘baseline’ driver of climate policy, with other

measures aligned to it (whereby the extent of necessary alignment can be assumed to be limited);

3. Stability & Predictability

• CDF is a simple policy measure that lends itself well to stable/long-term implementation;

• Prices can be increased transparently over time, sending out strong investment signals;

4. Transparency

• It is difficult to imagine a more straight-forward pricing policy;

• Implementation can be simple (either utilizing an existing payment channel or initiating a new

one, e.g. based on digital wallets) and offers ways to bring about full process transparency;

5. Efficiency and Cost-Effectiveness

• CDF can safely be regarded as the most efficient and cost-effective emission reduction policy;

• If levied at source, collection costs/complexity can be minimized;

• Payments to households can be made on a visible, monthly basis, fully automated;

60 It is worth noting that how a scheme is called may indeed have some significance (e.g. The Daily Star, 21/10/2018, https://bit.ly/2yr9lsA). In some countries/languages, a ‘tax’ that is collected and distributed back to the economy (budget neutral) is not termed/classified as tax but rather ‘levy’/’fee’ (e.g. German ‘Lenkungsabgabe’) 61 ‘Imposition of the CO2 levy on heating and process fuels’, Swiss Federal Office of the Environment, accessed 11/02/2019, https://bit.ly/2AnrRUc 62 Exemplary source: ‘Driving carbon prices northward’, Politico, 26/10/2018, https://politi.co/2yOPQKP 63 ‘Carbon Dividends Plan’, Climate Leadership Council, 03/2017, https://bit.ly/2BYrvCl 64 Exemplary source: ‘People’s payout gathers steam as a fairer way to tax carbon’, Megan Rowling, Reuters, 04/02/2019, https://reut.rs/2HWFHTv

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6. Reliability and Environmental Integrity

• As is true for any pricing scheme, a CDF’s impact (and thus integrity) depends on the pricing levels

set, its signalling power and enforcement;

• Given the simplicity of CDF, transparency will be high, and thus reliability will likely be high as well;

7. Fair use of revenues

• A redistribution to households in equal amounts is at the core of CDF’s value proposition;

• This represents a very fair and efficient use of revenues – in the form of a straight forward and

focused way to internalise externalities, and to avoid political debates on the use of revenues;

• Current research and the emerging evidence on distribution effects suggest that 50-70% of

households net-benefit (see below), with CDF-type policies already being referred to as a ‘Robin

Hood Carbon Tax’65;

8. Simplicity

• CDF can safely be termed the simplest way of pricing emissions;

• Particularly if emerging digital solutions are fully leveraged, CDF will be easy to communicate,

understand, implement, and operate;

9. Adjustable between borders and between businesses in value chains

• Because of its price-based approach, pricing stability, and simplicity, CDF lends itself well to

adjustments between stakeholders;

• Different pricing levels can be adjusted on exchange (rewarding emission pricing leaders rather

than laggards);

• An international advocacy body should further CDF, inclusive of cross-border and cross-

stakeholder linking (avoiding leakage, double counting, etc);

10. Also catering to negative emission schemes

• CDF can and should allow for investments in carbon sinks;

• CDF can and should be adjusted at borders also to adjust for fossil fuel subsidies.

The ‘take and give-back’-, as well as the ‘all emissions’-approach of CDF are increasingly recognized as being

fair and pragmatic, leaving ‘purchasing power in the economy’, and not necessarily ‘bloating government’. A

key attribute of CDFs is the avoidance of political discussion on the use of revenues – and the likely positive

effect on the speed of potential global implementation in consequence.

The importance of how emission pricing revenues are used for public acceptance is finally beginning to be

recognized6667. The analysis of the recent defeat of Washington state’s carbon tax confirms the significance of

revenue use in the light of political feasibility, showcasing how the campaign of the fossil fuel lobby against the

tax “poked holes” in the specifics of the scheme, and “played into the scepticism of how government might

65 Exemplary source: ‘How about a Robin Hood carbon tax to combat climate change’, Ross Gittins, The Sydney Morning Herald, 24/11/2018, https://bit.ly/2I9Q2eV 66 CPLC, Conference Call on Communicating Carbon Pricing: “The strongest message is often, how the revenues are used”, George Marshall, CEO Climate Outreach, min. 07:45, https://bit.ly/2GP4vKH 67 Exemplary source: ‘Making carbon pricing work for citizens’, Nature Climate Change, 30/07/2018, https://www.nature.com/articles/s41558-018-0201-2

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distribute tax revenue”68. This flow of events occurs frequently. Often policy makers can’t agree on how

revenue shall be used, and strong lobby interests come to play. In consequence, alliances for majorities can’t

form and valuable implementation time and opportunities are lost.

The economic evidence is not yet fully conclusive on this, but the fact that CDFs tend to result in net-financial

gains for the majority of households697071 (and thus, from a social perspective, have a wealth-redistributing

effect) is of course of substantial relevance regarding political feasibility. France’s Yellow Vests are a striking

example of the importance of just transition with respect to emission pricing72. If measures primarily affect low

income households, political feasibility can rightly not be assumed. Movements such as #FridaysForFuture by

school children demanding serious climate action (starting in Sweden73), to the ‘#climate grannies’ (elderly

women suing the Swiss government for climate in-action74) demonstrate, on the other hand, that public

acceptance, in general, will grow in the light of the broader public demanding tangible decarbonisation.

In the context of the Yellow Vests, the attractiveness of CDF is now gaining more attention75. Although CDF

distribution effects in less developed economies are not yet sufficiently researched, CDFs can also be regarded

as very attractive emission pricing options for those nations as well. The fairness, simplicity, and transparency

attributes of CDF obviously are relevant in this respect. In addition, CDFs may also be regarded as an opportunity

for governments to connect digitally with those citizens/households it is not yet connected to. Because of the

distributive-element, those citizens will have an interest to establish such a connection – from which the digital

relationship could be extended.

68 ‘A carbon tax proposal failed this week. But the fight is just the beginning’, Justin Warland, Time, 08/11/2018, http://time.com/5447748/washington-state-carbon-tax-climate-change/ 69 Approx. 70% of households in the US, according to the Climate Leadership Council, https://bit.ly/2kQ7jdG. 70 A carbon tax of USD49 applied and redistributed in the US would protect the purchasing power of 61% of US individuals, including 89% of those in the bottom half of income distribution according to this 05/2017 by the New Colleague of Florida and the Colorado State University, https://bit.ly/2PfbG4q 71 Analysis on the distributional effects of CDF are also becoming available for Canada, e.g: ‘Canada passed a carbon tax that will give most Canadians more money’, Dana Nuccitelli, The Guardian, 26/10/2018, https://bit.ly/2O7Lu6j 72 ‘Climate justice means economic justice’, Nicolas Haeringer, 350.org, 18/12/2018, https://bit.ly/2NcAEwU 73 The movement was initiated by then 15 year old Greta Thunberg, https://en.wikipedia.org/wiki/Greta_Thunberg 74 ‘Grannies against climate change’, Carlo Pisani, SwissInfo, 19/01/2017, https://bit.ly/2Vt7mgw 75 The ‘dividend’ subject is gaining attention internationally. One recent example is Ireland, where a CDF-type solution appears to be the emission pricing option currently favored by the ‘Climate Action Committee’ working on solutions to address Ireland’s climate objectives. See, for example, ‘Debate on carbon tax increases divides Climate Action Committee’, Kevin O’Sullivan, Irish Times, 08/02/2019, https://bit.ly/2BsLnPh

Image: Yellow Vest protest, France 11/2018, ©Reuters

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.

Highlight: Citizens’ Climate Lobby

by Joseph Robertson

Citizens’ Climate Lobby is a nonpartisan, non-profit organization based in the United States.

Through its sister organization Citizens’ Climate Education, CCL provides free ongoing policy

education, civic empowerment, and organizing support to citizen volunteers around the world. CCL

has more than 100,000 volunteers in 47 countries across 6 continents. CCL is a founding strategic

partner in the Carbon Pricing Leadership Coalition (CPLC), and introduced the PARIS Principles on

Efficient Carbon Pricing 15 months before the COP21.

Since 2007, CCL has been the only organization whose core mission is to educate and empower

citizen volunteers to establish ongoing working relationships with lawmakers, to work toward

efficient, effective, equitable carbon pricing policy. In that time, CCL volunteers have had over 5,000

meetings with lawmakers in the United States. In 2017 and 2018, they published 7,244 letters to

the editor in newspapers, as well as 1,228 full-length op-ed articles, and secured 158 editorials from

newspaper editorial boards.

It was CCL volunteers who worked with members of the U.S. House of Representatives to launch

and build the Bipartisan Climate Solutions Caucus, which grew to 90 members (45 Republicans and

45 Democrats) before the 2018 Midterm elections changed the make-up of the Congress.

All of this work has led to the introduction of the Energy Innovation and Carbon Dividend Act in the

U.S. House of Representatives on November 26, 2018, by Rep. Ted Deutch, with two Republican

and two Democratic original co-sponsors.

• On January 24, 2019, the Energy Innovation and Carbon Dividend Act was reintroduced in

the new Congress as H.R. 763. H.R. 763 puts a fee on carbon-emitting fuels at the point

where they enter the economy, making it administratively simple, allowing it to cover the

whole economy, and ensuring maximum transparency.

• The fee starts at $15/ton and rises by $10/ton per year. 100% of net revenues are returned

to households in equal shares, as monthly dividend checks. It is projected to reduce US

emissions by 40% by 2030 and by 90% by 2050.

CCL Canada volunteers worked tirelessly to build substantive working relationships with their

members of Parliament and with government ministers and provincial leaders, to build political will

for carbon fee and dividend, as an administratively simple, transparent way to price carbon and

build new economic value. Their work was crucial to establishing fee and dividend as the reference

for Canada’s national carbon pricing backstop and its climate action incentive rebates.

CCL supports the high-level Acceleration Dialogues as well as the Resilience Intel climate-smart

finance information service, which is now in the design and network-building phase. CCL views the

participation of citizens and stakeholders and the integration of transparent efficient carbon pricing

policies as a vital for moving toward economy-wide climate-smart finance and investment.

C21 and CCL will serve as the founding partners of an international alliance promoting CDFs (see

below). CCL’s support will include design and moderation of high-level convenings, deployment of

the Engage4Climate Toolkit for stakeholder meetings, the ongoing education and empowerment

of its global network of citizen volunteers, and development of strategies to align existing and

emerging policy with the PARIS Principles and other critical climate-related goals.

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7. 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. This shall be achieved through (i) the setup of

an advocacy body, (ii) the commissioning of research in the area of distribution effects and international linking,

and (iii) by developing a CDF use case that leverages the latest technology and shall serve as a template/base-

case application accelerating specific national implementation efforts.

The International Climate Dividend Alliance (ICDA)76 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), as well as others such as the “Australian Climate

Dividend Plan (ACDP)”77.

ICDA shares the views of many that the pricing of GHG emissions represents a key policy strategy necessary to

fight climate change. In the opinion of ICDA, however, the current emphasis on policies relating to ETS, and, to

a lesser extent, taxes on emissions, is misguided. 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. Similarly to IETA regarding ETS, ICDA’s mission shall be to promote and deepen the

understanding and implementation of CDFs as the policy tool practically enabling exponential decarbonization

(as per the Paris Agreement, and specifically to net-zero emissions by 2050). Through convenings, reports,

policy summaries, and advocacy with business and political leaders, ICDA seeks to serve the following specific

objectives:

1. To promote the understanding and advantages of, and interest in CDFs;

2. To deepen policy-makers’ learning, regarding CDF policy design and deployment - from an economic, technical, and communication point of view;

3. To build a shared vision and global movement around the implementation of CDFs;

4. To evaluate legal and technical infrastructure drivers and options for CDFs;

5. To prepare and support CDF-related border adjustments/linking;

6. To ensure specifically planned and deployed CDFs are sound, effective, and in line with the Paris Agreement and its implementation protocols.

In addition, ICDA shall be instrumental in organizing CDF-related research efforts. In cooperation with leading

universities and practitioners, analysis on the best way to levy CDF incentive fees, the most suitable way to

distribute CDF revenues to households, and the specific macro-economic distribution effects (in particular,

the number of households net-benefitting and the overall macro-economic consequences of the policy) shall

be analyzed. For this, ICDA shall source funding and coordinate efforts among leading national universities

who each engage in research activities for their country. This work shall build on the existing research results

76 For this purpose, the URL climatedividend.org (Twitter @ClimateDividend) was reserved. 77 http://www.grandchallenges.unsw.edu.au/climatedividend

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available for selected nations (e.g. Canada and the US). It shall include both developed and developing

nations, and specifically France, Switzerland, China, India, UK, Germany, and Chile. Research results on

specific markets shall continually be published, and thus help to continually raise awareness on the subject.

This shall include the upcoming CPLC workshop held on 12/04/2019 in connection with the World Bank’s

Spring Meetings in Washington DC, the UN Secretary-General’s Climate Summit in New York (09/2019)78, as

well as UNFCCC’s COP25 climate conference in Chile.

In addition, ICDA shall cooperate with the Cleantech21 foundation (C21)79 on a specific CDF use case. C21 has

already initiated such a use case as part of its #Hack4Climate innovation program80. For this purpose, a

template CDF has been defined and shall be developed with these main parameters (also see Image):

1. Simple incentive fee collected upstream — and including all GHG emissions. It is national/regional in

scope, allowing for varying price-levels internationally, not requiring one global price. The fee-level is

increased over time, intrinsically linked with emission reduction targets and effective progress made;

2. The incentive fee is passed on from emitters to other businesses as part of market transactions. These

are adjusted internationally across borders and value chains (reflecting different price levels, incl. fossil

fuel subsidies, and also allowing the integration of stakeholder-driven/internal/voluntary pricing);

3. Redistribution of income equally to all households via a dividend payment (direct/visible pay-out, not a

tax rebate), allowing pre-allocations of up to 1% of total income for administration and R&D activities;

4. Full process transparency to all stakeholders (incl. emitters paying incentive fees, adjustments, use of

funds, and distribution to households).

5. Integrated negative emissions schemes (financed, in part, from fee income prior to redistribution,

annually adjusted as per the emission-reduction progress achieved).

Image: Climate Dividend Framework (CDF) schematic, C21/#Hack4Climate, 10/2018

78Called for by UN’s Secretary-General and to be held on 23/09/2019 in New York, https://bit.ly/2OvN3iQ 79 Zurich-based not-for-profit foundation, co-founded in 2009 and managed by this author since, www.cleantech21.org 80 The #Hack4Climate mission is to contribute to 1.5C-compatible/exponential climate action by way of disruptive regulatory and technological innovation. The program includes a challenge definition, hackathon and use case accelerator track. The hackathon takes place as part of an annual anchor event during COP climate conferences (after video of first event during COP23, https://bit.ly/2R2kOGV).

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The Climate Dividend use case is conceived to eventually consist of:

a) Best practices and tools to collect incentive fees;

b) Best practices and tools to distribute revenues to households.

c) A system governed by all the participating national/regional governments in cooperation with UNFCCC, linking national pricing for allowing international adjustments that avoid double counting;

As part of the use case, the application of distributed ledger technology (DLT) shall be evaluated – both for

national collection/distribution systems, as well as with respect to an international transfer ledger. DLT may

offer a number of ways how common implementation challenges can be specifically addressed (see table

below). First and foremost, DLT could strengthen the trust element that is so vital for political feasibility –

both for implementing national schemes as well as for international linking.

Table: Key challenges for implementing emission pricing, potential for DLT application

Challenges Potential for DLT application

Political Feasibility Higher trust levels due to greater transparency of distributed system – with

incentive fee and dividend transactions being publicly visible/traceable.

International Linking,

Leakage

Pricing can be passed on and adjusted between companies and countries, similar

to ‘supply chain’ DLT use cases.

Stakeholder Integration Linking to internal pricing schemes of businesses (e.g. for tax credits or other

forms of incentives to leaders).

Transaction Costs Reduced number of intermediaries, automated payments based on smart

contracts (collection & distribution), which, however, also depends on other e-

Government infrastructure/legal frameworks being in place.

Fraud Prevention Distributed storage leading to higher security (e.g. against hacking/private

information theft).

Source: Author’s own analysis

With or without DLT, the objective of the CDF use case shall be to find the most efficient technology solution

for contributing to the overall ICDA objective of supporting rapid global deployment of 1.5C compatible

emission pricing. For this, C21 can leverage its global network of #Hack4Climate software developer talent.

Image: 100 hackers from 33 countries gathering at COP23 for 1 week of #Hack4Climate (11/2017), seeking disruptive innovation for climate action.