November 18th, 2020 by Brad Rouse
Dividends are fabulous. In investing, dividends pay you to wait while your investments grow.
If we aggressively pursue the energy transition, every one of us will receive dividends as we invest in a brighter future. As is the case with many investments, the energy transition may be justified (and sold) based on the dividends alone. The fact that our offspring inherit a livable world might just be a side benefit.
Multi-Solving Our Way
The US still has divided government. The dreams of a blue tsunami in 2020, along with the Green New Deal, are diminished, at least for now, with the results of the 2020 election. The energy transition will continue, but as I outlined previously (here and here) we are far off the pace we need to achieve a “100% renewable, everything electrified” future by 2050. We need to expand our efforts in solar and wind 5-6 times versus 2019 and that requires strong government policy. With divided government again, do we here in the US have a hope of success?
We should focus on “multi-solving” and “dividends.”
Multi-solving is simply solving more than one problem with the same action.
An example of multi-solving is an effort I co-founded in 2017 to reduce fossil fuel consumption AND help the less fortunate. Energy Savers Network (ESN) in Asheville, NC mobilizes our community to help low income people reduce energy use with simple home upgrades such as air sealing, water conservation, LED lighting, and so on. ESN has received support from Democrats and Republicans alike exactly because the “side benefits” also known as “the dividends” sold the project for those who didn’t particularly value the climate or energy transition benefits. Saving money for constituents, for them, was the dividend that made the difference. Multi-solving.
An Actual Dividend
The design of policies can make a huge difference. For example, take tax credits for electric vehicles. This type of policy makes income inequality worse because it favors people who can use a tax credit and who can afford a new car — e.g. middle and upper-income folks. We shouldn’t adopt policies that make major societal problems worse, unless such policies are the only option.
A much better policy would help ease the transition for all Americans, especially those who are low income. The best example I know of such a policy is the Energy Innovation and Carbon Dividend Act (EICDA), which prices carbon by charging a steadily rising fee on fossil fuels and then returns all of those funds to legal residents as a “dividend.”
Economists from both sides of the aisle agree that pricing carbon is the most economically efficient and lowest cost method of guiding the energy transition. As I demonstrated in an earlier article, the EICDA creates powerful incentives to speed up the energy transition. But carbon fees or taxes are often criticized because they “hurt the poor.”
The EICDA turns this argument on its head. EICDA helps the poor. I repeat, EICDA reduces income inequality. Recently Kevin Ummel, President of Greenspace Analytics and a research associate at the University of Pennsylvania produced a working paper examining the issue. Titled “The Impact of a Carbon Fee and Dividend Policy on the Finances of U.S. Households,” the study examines the impact of the EICDA on people of different income levels.
The study compares the direct and indirect costs of carbon that people will pay versus the level of dividend they will receive in the first year of implementation. The first-year fee is $15 per ton, paid by fossil fuel companies. All revenue net of minor administrative costs is returned as a dividend to legal US residents. No revenue is used to fund government spending. The fee increases annually, but the study only looked at year one.
The fee creates a major incentive for people and businesses to change energy consuming behavior and investments. The dividend eases the shock of the increases in costs consumers will face as fossil fuel companies pass along most of the fee to their customers. The following chart from the study illustrates the impact by consumption quintile from the bottom 20% to the top 20%.
The bottom three (60%) quintiles (lower and middle income) come out ahead under the EICDA. For example, look at the numbers for the bottom quintile. Each family of four receives $514 per year in dividends, after tax. Each family also sees increases in their energy costs of $273, split evenly between direct costs (transportation and utilities) and indirect costs (energy in food, clothing, services, etc.). Upper-middle brackets break even and only the most prosperous have an increased financial burden. The top quintile has $921 in costs including direct, indirect, and investment losses. However, the upper income classes have the greatest ability to make investments to change their energy spending patterns if they choose.
The study clearly shows that the dividend changes the policy from regressive to progressive and thus improves income inequality.
Also, consider an additional benefit of the dividend. Lower income people have a greater “propensity to consume.” Each dollar available to a lower income person is almost certain to be spent. Dollars available to an upper income person are much less likely to be spent. Thus, the rebate provides a stimulative economic benefit which will have rebound affects in spending jobs. This is on top of the economic improvements due to the investment boom that will result from an acceleration of the energy transition.
Many Other Dividends Of The Energy Transition
There are many other “dividends” or “multi-solving benefits” of the energy transition, especially if we accelerate it with an enlightened policy of combining something like the EICDA with targeted investments in research and in removing barriers.
My list is as follows:
Fairness: We all want a fairer society — one where no one has an extreme built in advantage over another. What’s unfair today is that causing pollution creates an economic advantage by not having to pay the cost imposed on others. Carbon pricing creates a fundamental step toward fairness because the businesses and people who are more responsible for creating this harmful pollution will have to pay more. A fairer society will be a dividend.
Less regulation: Regulations are a fact of life, but complying with them takes time and costs money. Solving the climate through market-based approaches like carbon pricing reduces the need for other regulations to achieve the same result. Less regulation will be a dividend.
Lower cost of energy: The costs we pay for utilities and transportation fuels will be lower based on the efficiency of electricity versus fossil fuels and on the decline in electric costs likely when lower cost solar and wind replace existing power plants. This will be even more the case once the upfront costs of solar and wind are amortized (paid) because access to the wind and sun are free. This will help us move toward a more prosperous future. The amount we pay may be higher during the transition, due to the carbon fee, but that part of the cost is rebated. The net cost for fossil fuels will be lowered as well due to reduced demand lowering the net amount producers are able to obtain in the market. A lower cost of energy will be a dividend.
Air quality: I live in western North Carolina, and this year we have some of the cleanest air and clearest mountain views in decades. Why? We no longer burn coal and people have been driving less due to the pandemic. Think about how clean the air would be if no one polluted when driving and we didn’t use coal or natural gas for electricity. Clear mountain views and easier breathing will be a dividend.
Health: Cleaner air provides another benefit — far greater health and a lower death rate due to air pollution-related diseases such as asthma. And with no natural gas or oil drilling we don’t have the health damages that go along with that. Ditto for coal mining health problems. Medical costs will go down as health improves. Better health will be a dividend.
Local: We are disconnected from what we consume. We buy things on Amazon or at Walmart or at the gas station and we have no clue where or how it was made. The energy transition means we will rely on energy produced locally from the wind and the sun. We will see it when we walk or drive around. We will be more connected to that critical part. Some of us will have it on our houses. This will provide jobs and income in our local area. Spending more of our energy dollars near home and being reminded every day of how it is made will be a dividend.
Resilience: With local production comes the opportunity for local resilience. Microgrids which combine renewable production with energy storage and which can operate when needed in the absence of the grid will increase local areas’ ability to bounce back from disaster. Solar rooftop production and home energy storage or EV batteries that also perform as backup power supplies can provide such resiliency for homes and small businesses. Improved disaster resilience will be a dividend.
Economy and jobs: The investment boom required for the energy transition will require many, many new jobs. Those new jobs will be over all the country, and unlike the fracking boom, they won’t require “man camps” in the Dakotas and elsewhere. The economy will improve also because of the distributional affects of a carbon fee and dividend approach as lower income people spend more of their cash. Over 2.1 million additional jobs were predicted based on this effect in a 2013 study, and other more recent studies show similar economic benefits. An improved economy with more jobs will be a dividend.
Fewer wars and opportunity to reduce military spending: Once we are no longer dependent on foreign countries for energy, there will be less need for us to get engaged in far-away military conflicts. This means reduced need for overseas deployments. Fewer wars and lower military spending requirements will be a dividend.
Improved economic prospects for rural areas: Our rural areas have been left behind by recent economic advances. The energy transition provides two helpful shots in the arm. First, much of the wind and solar deployment will be in rural areas, providing significant economic opportunity. This will provide jobs in rural areas and a source of income for landowners. Second, carbon fee dividends will be especially valuable to rural areas due to their lower income. Improved economic prospects for rural areas will be a dividend.
Helping the poor: This energy transition will help the poor through (1) the dividend, (2) more jobs, (3) help to rural areas, and (4) reduced pollution-related health issues which disproportionately affect low income and people of color. In addition, low-income people tend to pay more for direct energy per square foot in their homes and living in older homes. In the southern US, many low-income people live in mobile homes that are not energy efficient. I favor expansion of income-qualified energy efficiency and weatherization programs, which will definitely help the poor. And helping the poor will be a dividend for all of us.
Working together: Liberals like carbon pricing as a solution because it will be effective at speeding the energy transition. Conservatives like carbon pricing because it is a market-based solution and doesn’t rely on the government to pick winners and losers. Economists of both political persuasions like it because they agree that carbon pricing is the most “economically efficient” policy. Getting a bi-partisan agreement on such an important issue will be a dividend.
It has often been said that climate change makes other problems worse. Storms are worse, floods are worse, food shortages are worse, fires are worse, droughts are worse, disease is worse, rising seas are worse, inequality is worse, etc.
If we act on climate, especially with a carbon fee and the revenue returned as a dividend, we can make these problems “less worse.” Even better, we can make solid progress on other problems by designing our solutions to multi-solve.
Here is an analogy for this. Imagine a person with a potentially fatal disease. In the past, the person’s disease could only have been treated with medicines that cause severe side effects. The symptoms to date have been manageable. The modest steps our patient has taken so far are not enough to stop progression of the disease. Our patient has become quite annoyed with the nagging from family members, and now he says believes he doesn’t have the disease.
But recently, research has created a new effective treatment for the disease, with side effects that are quite pleasant. The medicine must be taken immediately. Unfortunately, the patient feels no sense of urgency to take the medicine, because he’s convinced himself he doesn’t even have the disease. He’s still feeling fine, doesn’t trust doctors, and is increasingly annoyed at nagging family members. Now, he would even agree to take the new medicine if he doesn’t have to admit he has the disease. What to do?
So please, let’s just take our medicine, even if we don’t believe we have the disease. The side effects will be pleasant, we will get a multitude of dividends, and those annoying family members will finally shut up about it!
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