Frequently Asked Questions
Why is it important to reduce carbon emissions quickly?
The burning of fossil fuels has added such a large volume of greenhouse gasses to the atmosphere that it is threatening the livability of the planet. Greenhouse gasses cause the Earth to warm, which in turn causes storms, floods, heat waves, wildfires, and droughts to be more frequent and more extreme.
Carbon dioxide is the dominant greenhouse gas, and its concentration in the atmosphere is rising dramatically. It reached 420 parts per million recently, 50 percent greater than it was prior to the Industrial Revolution (see “The Keeling Curve”).
After carbon dioxide is emitted into the atmosphere, it stays there for 300 to 1,000 years, according to NASA. What we do now—or fail to do—will have impacts for many generations.
Hawai‘i has declared a climate emergency and set a goal to be carbon-negative by 2045. If we are to succeed, we need to reduce our carbon emissions economy-wide; we need a policy that addresses emissions in all sectors.
The Keeling Curve
How Does Carbon Cashback Work?
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Carbon cashback is a simple tool that would reduce emissions throughout the economy. It would impose a fee on fossil fuels at their initial point of distribution in the state, via an increase in the barrel tax, and return all of the revenues (minus a small amount needed to cover administrative costs) to Hawai‘i tax filers and their dependents in the form of a refundable tax credit. Each adult would receive an equal share of “cashback”, with each dependent receiving a half share. The rebate amount for each year would be specified in law, and would not depend on a family’s level of consumption of fossil fuel products.
The increase in the barrel tax would incentivize households and businesses to shift away from fossil fuels, and the cashback would provide relief to families, making the vast majority of them financially whole or even better off.
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The climate rebates would be given to resident income tax filers of refundable tax credits. Businesses and other entities would not be eligible.
To receive a rebate, one would need to file a Hawai‘i State tax return. The Department of Taxation could develop a simplified form to be filled out by those with no tax liabilities. Carbon cashback could encourage more people to file taxes, and complement existing efforts to bring low-income residents into Hawai‘i’s tax and benefits system. For example, low-income residents eligible for the Refundable Food/Excise Tax Credit, Child and Dependent Care Tax Credit, Earned Income Tax Credit, Tax Credit for Low-Income Household Renters, or other programs might be more likely to file a tax return and become eligible for these other programs if they knew they would also receive a carbon cashback rebate. In other words, carbon cashback could encourage low-income residents to make use of other programs for which they’re already eligible. Carbon cashback would have no eligibility requirements or strings attached—all income tax filers would receive equal shares. Policymakers may want to require that some portion of carbon cashback administrative funding be utilized for outreach to maximize low-income resident participation, particularly in the initial years.
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Implementation of carbon cashback would not be difficult at all, as it would make use of existing tax mechanisms. It therefore wouldn’t grow the government. As to how to implement a carbon cashback policy, the 2020-2022 Tax Review Commission made the following recommendations:
“The state government implements an upstream carbon tax by making use of the existing administrative infrastructure surrounding the barrel tax. This approach limits the administrative burdens of establishing a carbon price in Hawai‘i …”
Use of existing administrative infrastructure for carbon tax administration, and return of funds to households via existing income tax credit mechanisms would eliminate the need to develop new government programs, and maximize revenues to be distributed to residents.
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Yes. A 2021 study by the University of Hawai‘i Economic Research Organization (UHERO) finds that carbon pricing set at the level of the carbon cashback bill would reduce Hawai‘i’s greenhouse gas emission rate in 2045 by 13 percent (the equivalent of taking more than 400,000 cars off the road), and reduce cumulative emissions from 2025 to 2045 by 10 percent. This would go a long way in helping the State achieve its goal of becoming carbon-negative by 2045.
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Expected greenhouse gas emissions in Hawaii under the baseline (no carbon fee), a $70/tonne fee, and a $1,000/tonne fee. The carbon cashback bill is based on a carbon fee that peaks at $70 per tonne of carbon dioxide equivalent. For comparative purposes, the UHERO study also analyzed the impact of a much higher fee of $1000 per tonne. Source: 2021 UHERO study
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Carbon cashback is designed to promote social and economic justice. Carbon pricing mechanisms where revenues are retained by the government to implement climate programs, such as zero-emission vehicle rebates, would not promote social justice, since low-income residents are financially constrained, resulting in most zero-emission vehicle rebates going to higher-income residents. With zero-emission vehicle rebates, the government provides a source of relief from higher gasoline prices for higher income households and provides no relief to lower-income households. However, a carbon pricing policy with the fee revenue returned to Hawai‘i residents in equal shares in the form of a climate rebate would provide lower income households financial relief from the higher energy prices. This policy is therefore progressive—that is, low-income households, on average, would financially benefit more than high-income households.
The UHERO study found that a carbon cashback program where at least 50 percent of revenues are returned to residents would be progressive, and the more revenues that are returned to residents, the more progressive the policy. This is because lower-income households, which tend to purchase fewer goods and services than higher-income households, would pay less in carbon fees than higher-income households on average, yet receive the same climate rebate. The average lower-income family would receive far more money in the climate rebate than it pays out in the carbon fee. Further details can be found in the UHERO report.
Carbon cashback sits at the intersection of carbon pricing and climate justice. Learn more
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The latest report of the Intergovernmental Panel on Climate Change states: “Pricing of greenhouse gases, including carbon, is a crucial tool in any cost-effective climate change mitigation strategy, as it provides a mechanism for linking climate action to economic development.”
The first Africa Climate Summit, in September 2023, ended with a call for world leaders to rally behind a global carbon tax on fossil fuels, aviation and maritime transport, and to seek reform of the world financial system that forces African nations to pay more than other countries to borrow money.
Similarly, the World Bank asserts that carbon pricing is the most effective way to reduce climate pollution, and thousands of economists, including twenty-eight Nobel Laureate economists, four former Chairs of the Federal Reserve, and fifteen former Chairs of the Council of Economic Advisors (see https://www.econstatement.org/), have said that “a carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.” The Group of 20 (G20), which includes the United States, the European Union, China, and India, representing 90 percent of the world’s economy, encourages the appropriate use of carbon pricing when used among a wide set of tools to control climate change.
Two former secretaries of state, George Schultz and James Baker, supported carbon pricing as members of the Climate Leadership Council. The Business Roundtable, religious groups, Pope Francis, and many prominent individuals and businesses also endorsed carbon pricing. Two-thirds of Americans favor taxing corporations based on their carbon emissions, according to a recent Pew Research Center Survey.
Carbon pricing policies have been adopted in about fifty countries, with almost a quarter of all global emission covered. Some pricing schemes are too weak to have a meaningful impact on emissions, but where prices are sufficiently high, evidence is growing about their positive impact, and the policies are proving popular where carbon pricing proceeds are returned to residents.
British Columbia implemented its carbon fee in 2008, and it is currently $45/tonne. Studies have shown that it has had a minimal impact on the economy, while reducing emissions per unit of gross domestic product between 5 and 15 percent. The carbon tax has been so effective in British Columbia that the entire country of Canada has adopted it (see here for a recent review). Here's a link to a calculator that shows numerically lower income groups benefit the most. Carbon Tax Costs for Canadian Households
Sweden implemented a carbon fee in 1991 and has the highest price globally, at $137/tonne. It reduced its emissions by 25 percent by 2000. At the same time, its economy grew by 60 percent.
Carbon pricing encourages investment and innovation in clean energy solutions. The European Union’s carbon price, currently about $95/ton, has been cited as one of the main reasons electric vehicle penetration in Europe far exceeds that in the United States (Climate Now podcast 2/22/2022). Furthermore, Metcalf and Stock find that the EU’s carbon price has had a very negligible impact on its overall economy.
The EU also is leading the way in cross-border pricing schemes. Its carbon border adjustment mechanism, designed to level the playing field for EU businesses and encourage trading partners to adopt their own carbon prices, is currently in a reporting-only pilot phase, but in a few years tariffs will be imposed on the carbon content of imports that are not subject to comparable carbon prices in their countries of origin.
In the United States, carbon fees with rebates to households have not been established, but cap-and-trade programs, which also effectively put a price on carbon, have been implemented in California, Washington, and a group of twelve northeastern States.
Why Carbon Cashback in Hawai’i?
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Addressing climate change is a collective action problem in which everyone needs to reduce their carbon emissions locally to make a difference globally. Although Hawai‘i’s contribution to global greenhouse gas emissions is small, its actions can help to incentivize other jurisdictions to act. With collective action, significant reductions will occur. We can only ask others to help protect our islands from climate change if we take action ourselves. Just as Hawai‘i was one of the first states to adopt a goal of becoming carbon-neutral and others followed, it can set an example for other jurisdictions to follow when it comes to taking effective action toward this goal with carbon pricing.
In addition to doing its part to reduce global greenhouse gas emissions, a local carbon pricing policy can provide direct benefits to Hawaii in the form of lower and less volatile electricity prices. Renewable electricity sources are now cheaper than most fossil fuel sources, as illustrated by comparing the electricity prices of the Kauai Island Utility Cooperative (about 60% of production from renewables in 2022) to those of Hawaiian Electric (about 32% of production from renewables in 2022). The more quickly we transition away from fossil fuels, the faster we can take advantage of cheaper and less volatile prices, to the benefit of businesses, families, and Hawaii’s economy as a whole.
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The top recommendation for tax reform from the 2020-2022 Tax Review Commission is a carbon tax with the majority of proceeds paid back to households—that is, carbon cashback.
Under the State Constitution, a new Tax Review Commission is appointed every five years to evaluate the State’s tax structure and recommend revenue and tax policy to the State Legislature. According to Chapter 232E of Hawaiʻi Revised Statutes, the Commission members are appointed by the Governor, and the Commission is to conduct its review of the State’s tax structure using such standards as equity and efficiency. The 2020-2022 Commission delivered its recommendations to the State Legislature in December 2021, with carbon cashback at the top of the list.
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Yes, ultimately, we need to have national carbon pricing. While some other states have implemented carbon pricing policies, none have returned the majority of the revenues to households. Hawai‘i can lead the way to show that carbon pricing can be progressive, easy to implement, and reduce emissions, implementing what many economists have said is the most cost-effective policy to reduce emissions (see https://www.econstatement.org/). Ultimately, carbon pricing initiatives in Hawai‘i and other states can lead to a national carbon pricing policy, with inclusion of a border carbon adjustment to maintain the competitiveness of U.S. businesses.
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As long as the national policy employs the same or greater level of carbon pricing, the local carbon pricing program can be repealed, allowing the federal program to supersede it.
How would Carbon Cashback impact Hawai’i?
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Two recent studies indicate that carbon cashback would be effective in reducing carbon emissions, and would on average financially benefit all but the wealthiest households. The University of Hawai‘i Economic Research Organization (UHERO) study entitled "Carbon Pricing Assessment for Hawai‘i: Economic and Greenhouse Gas Impacts" (April 2021) was commissioned by the Hawai‘i State Legislature in 2019 to better understand the implications of a carbon fee and dividend policy. A follow-up study was sponsored by the State of Hawaiʻi Tax Review Commission (TRC) via the State Department of Taxation. These two studies examine the economic impact on Hawai‘i households and businesses of a carbon cashback program with a carbon fee set at the Obama-era social cost of carbon ($50/MT in 2025 rising to $70/MT in 2045, in 2012 dollars). Key takeaways include:
If carbon tax revenues are given back to households in equal shares, a carbon tax is progressive—meaning this revenue recycling scheme benefits lower-income households more than proportionately. This progressivity occurs because higher-income households tend to consume more fossil fuels and more goods and services overall and are thus contributing directly and indirectly more of the carbon tax revenues.
A carbon tax set at … about $50 per metric ton (in 2012 dollars) of CO2 has small impacts on the overall economy. Returning revenues back to households in equal shares makes households economically better-off.
This policy would lead to a 10% reduction in cumulative CO2 emissions from 2025 to 2045
Based on the results of these studies, the Report of the 2020-2022 Tax Review Commission to the Legislature recommends that Hawai‘i:
Impose a carbon tax to incentivize moving away from carbon-based fuels and adopting clean energy. We recommend that the majority of the proceeds be rebated as a cashback to the residents of Hawaiʻi, with a disproportionate distribution to low-income households.
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On average, all but the wealthiest households would be better off, even with higher energy prices of fossil fuel products, because of the climate rebates (i.e., cashback). Carbon cashback would help the lowest-income households the most because the wealthiest households tend to consume the most fossil fuels and more goods and services overall. Wealthier households therefore would pay more in carbon fees. The 20 percent of Hawai‘i’s households with the lowest incomes would have a net benefit of about $900 per year, on average: the typical $1,000+ per household rebate would exceed the estimated average $100 increase (all in 2012 dollars) in fossil fuel energy costs due to the carbon fee.
When the carbon rebates are at their peak, the spending power of households in all income groups, on average, would be greater than without the policy, and the poorer the household, the more it would benefit.
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Source: 2021 UHERO study
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For most people with long commutes, the climate rebate would at least pay for the higher price of gasoline. For example, in the fifth year of the program, the climate rebate would be $289 per person and the carbon emissions fee would be 40 cents per gallon of gasoline if fuel providers pass along the full fee. $289 would pay for the emissions fee for 723 gallons of gasoline ($289 / 40 cents per gallon). For a car that gets 25 miles per gallon, the 723 gallons of gasoline would enable the car to drive 18,000 miles (723 gallons X 25 miles per gallon). There are 250 days in a typical work year (365 days minus weekends and holidays), so the commuter could drive 72 miles each workday, or 36 miles each way. Thus, the rebate would pay for the carbon emissions fee for the commute for a person living within 36 miles of their workplace. Keep in mind that other members of the family would receive their own climate rebates.
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As utilities transition to using more and more renewables to generate electricity because of declining costs of renewables and the state’s renewable portfolio standard, the carbon price would have a smaller and smaller effect on electricity prices. The carbon price would enhance this competitiveness. The utilities would be essentially rewarded for producing more power from renewables. For example, electricity prices on Kaua‘i, which has significantly more renewable energy generation than Oahu, are lower than Oahu’s petroleum-dominated electricity prices, and they would continue to be so until Oahu’s share of renewable generation approached that of Kaua‘i’s. In addition, the carbon price would incentivize more efficient operation of the existing fossil fuel-fired generating units.
The effect of the carbon cashback program on electricity prices would also depend on how much of the carbon fee the utilities are allowed to pass onto their customers. The smaller the share of the fee that can be passed through to customers, the smaller the increase in electricity prices.
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Hawai‘i tourism is relatively insensitive to changes in prices. The UHERO study finds that implementing the carbon cashback policy would cause only a very modest reduction in visitor spending (about 0.3%). The study assumed jet fuel would be taxed, so if the State decided to exempt jet fuel from the tax, the impact on visitor arrivals and hence expenditures would be even less. Economic studies and data suggest that carbon cashback would increase costs for a typical Hawai‘i visitor by about $1.40 per day, or $12 per visit (excluding the increase in air fares if the carbon fee is applied to jet fuel). These costs reflect the approximate environmental cost of carbon emissions for which the typical Hawai‘i tourist is responsible (excluding air travel). Nevertheless, the businesses that provide services to tourists (e.g., hotels and restaurants) would be encouraged to shift to cleaner energy and technologies.
Two advantages of carbon cashback for businesses are its predictability and its flexibility. The price on carbon would increase gradually in a specified manner, allowing businesses to plan for the future, such as budgeting for measures that increase efficiency and reduce fossil fuel consumption in their operations. And they would have complete flexibility in how they respond—they can implement whatever measures or adjustments they deem to be most efficient and cost-effective. This flexibility contrasts with mandates, which are prescriptive and generally lead to inefficient outcomes.
A carbon cashback policy would impact Hawai‘i’s economy as a whole only very modestly. The UHERO study finds that total economic output in 2045 would be about one half of one percent less than it would be without a carbon cashback program (i.e., the economy would still grow by almost the same amount as it would without the carbon fee). This outcome is due in part to the rebates: the spending power of most households in the State would actually increase, thereby greatly offsetting most impacts to the economy.
In summary, carbon cashback is the least-cost option for reducing greenhouse gas emissions in Hawai‘i. We also should keep in mind that any short-term costs to Hawai‘i’s businesses would be far smaller than the cost of doing nothing—of failing to stem the adverse effects of climate change on the State.
How does Carbon Cashback relate to other climate and energy policies?
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Carbon cashback would bring along visitors to be part of the solution; it would address direct and indirect carbon emissions for which tourists are responsible. In some activities such as car rentals, the carbon fee would directly incentivize tourists to use less fossil fuel, and in other activities, such as hotel accommodations, tourists would be incentivized to lodge at places that are less fossil fuel intensive because their prices would increase less from the carbon fee.
A green fee would charge all tourists the same fee regardless of their carbon footprint. A green fee is generally designed to address impacts on environmental resources generally, not just on the climate (e.g., beaches and forests).
With carbon cashback, visitors would pay the carbon fee, but since they would not be eligible for the cashback, their payments would contribute to the climate rebates for Hawai‘i residents.
These two proposed policies could work together to help Hawai‘i residents, encourage sustainable tourism, and preserve Hawai‘i’s unique beauty and culture for future generations.
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The table below summarizes the benefits of carbon cashback to Hawai‘i and its residents relative to other potential climate programs.
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Notes:
1) The carbon cashback and cap-and-trade programs are assumed to return all revenues less administrative costs back to households. The emission reductions achieved from either policy depend on the carbon fee or cap, respectively, but they can easily be designed to achieve well over 10% emissions reduction.
Though a cap-and-trade program is conceptually viable, and could benefit Hawai‘i from greater market access to permits from a linked system, it requires substantially larger upfront and ongoing administrative costs to operate successfully. In addition, there are no economic or GHG abatement benefits from a standalone cap-and-trade program for Hawai‘i relative to an upstream carbon fee because there are too few large emitters in Hawai‘i.
2) TRC = 2020-2022 Hawai‘i Tax Review Commission
3) RPS = Renewable Portfolio Standard
4) ZEV = Zero emitting vehicle from the tailpipe
5) Climate Reduction Goals are assumed to be non-binding; hence no enforceable reductions
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Carbon pricing would strengthen and therefore complement most other regulatory policies that are designed to reduce carbon emissions. For example, energy efficient technologies would penetrate the market faster in the presence of both a carbon fee and efficiency standard because the carbon fee would lower the price of the more efficient technology relative to the less efficient one. In the case of the Renewable Portfolio Standard (RPS), a carbon fee would further incentivize the utilities to reduce their fossil-fired generation by improving the efficiency of existing fossil-fired units and bringing more renewables onto their systems.
Carbon cashback would not conflict with or complicate any of these other policies; rather, it would magnify their impacts while ensuring a more equitable transition for low- and moderate-income households.
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It would increase the positive impacts of the IRA. The IRA is a big step forward in combating climate change. The IRA provides, through subsidies, financial incentives to consumers to purchase less carbon intensive technologies. However, Hawai‘i cannot rely on the IRA alone to achieve its 2045 net negative emissions goal. Enacting carbon pricing would raise the price of technologies that use fossil fuels or are more carbon intensive. Thus, the IRA lowers the price of cleaner technologies while a carbon tax would raise the price of dirtier technologies. The policies would work together to make cleaner technologies more cost-effective compared to dirtier technologies. Therefore, carbon pricing would complement the IRA and increase its effectiveness; it would allow State and Federal policies to work synergistically. For example, the IRA provides incentives for people to purchase zero-emission vehicles (ZEVs). Carbon pricing would create an additional incentive because ZEVs are less carbon-intensive per mile traveled than gasoline powered vehicles. Many of the benefits of the IRA will not be seen for many years because they accrue to future purchases rather than to changes in the operations of current technology (e.g., vehicles); whereas carbon pricing would have more of an immediate effect because it addresses the operation of current technologies, thus encouraging people to conserve energy and operate their technologies more efficiently.
Here is the effect of the IRA benefits for building efficiency and electrification along with other policies like permitting reform, carbon price and healthy forests on US Greenhouse Gas Emissions
