Fossil fuels are heavily subsidized both directly and indirectly. While there is plenty of room for debate about how much the hidden government and societal contributions are, there is no argument that it is substantial. The price at the meter or pump is artificially low. If prices reflected the cost of the products more accurately, there would be a shift from fossil fuels to renewables with little government regulation. This is called "free market."
A “carbon tax,” carbon fee,” or a “carbon fee with dividends,” is proposed as a way to recoup some of these socialized costs, and even the playing field with clean energy. People across the political spectrum support this idea, including stalwart environmentalists and conservative business people.
How Much of a Fee?
It is not realistic to apply a fee that represents the total externalized costs of fossil fuels to taxpayers. The price of energy would suddenly skyrocket and do serious damage to our economy.
Another possibility is a relatively small carbon fee, to be increased over time.
A conservative Republican group called the Climate Leadership Council which includes Lames A. Baker, Henry M. Paulson, and George P.Shultz, is proposing such a fee starting at 40 dollars per ton of coal. Fees would rise steadily and predictably over time which would allow companies to plan effectively. This idea has been popular among economists and climate change activists for many years. There is good agreement that this would reduce fossil fuel use and speed the transition renewable energy.
What to do with the fees collected?
Some feel the money should just be put in the general fund and reduce taxes proportionally. This typically would benefit wealthier people who pay a larger share of taxes.
A second proposal is to dedicate the money to climate change innovation and technology development. Alternatively, this money could be designated specifically for environment problems that result from fossil fuels such as clean-up for spills, healthcare resulting from pollutants, or extreme weather events. It could also be used to fund other social programs.
A third proposal, suggested by the Climate Leadership Council, calls for a “Carbon-fee Dividend.” The idea is to return the money to citizens in the form of a dividend. All citizens would receive the same amount, which is estimated to be about $2000 annually for a family of four, and would grow over time. The more the climate is protected, the greater the payments.
Since all people would receive the same dividend, more of the money would go to poorer people than the wealthy and would therefore be an economic stimulus which makes it basically progressive.
Conservatives like the fact that it will effectively address climate change without being a tax that grows the government. As Baker has said “it is a good proposal, it’s simple, it’s conservative, it’s free market, it’s limited government.”
Fundamentally, it really doesn’t matter where the money goes. Even if someone takes it into the in the backyard and buries it, it would still address more of the actual costs of fossil fuels and begin to provide a level playing field for clean energy. This would be a powerful way to use the market to move to a renewable energy world.
Dr. James Hansen describes the carbon fee dividend plan in this Ted talk (toward the end).https://www.youtube.com/watch?v=fWInyaMWBY8
Ted Halstead goes into greater detail in this Ted talk https://www.youtube.com/watch?v=ta2Wvy9F_gA