The fossil fuel industry seems to have us over a barrel, but there is a practical solution.
Whenever global oil and gas supplies are disrupted, U.S. fossil fuel companies raise prices because oil is a global commodity governed by supply and demand. When demand exceeds supply, prices rise until markets stabilize. Americans experienced this after the COVID shutdown, when global fuel demand rebounded faster than production. The embargo of Russian oil after that country’s invasion of Ukraine then further tightened supply and drove prices even higher.
While that was happening, the United States produced record amounts of oil and gas, becoming the world’s largest producer and extracting more than we used. Domestic producers were not paying significantly more to produce fuel, but higher global prices encouraged more exports, tightening supply in the U.S.
So the global supply shortage and consequent price spike translated into massive windfall profits for the U.S. fossil fuel industry while American families paid more for gasoline, heating, food and nearly everything else. The public’s misunderstanding of the cause of this proved costly to former president Joe Biden’s party in the 2024 election because oil prices tend to “rise like a rocket but fall like a feather,” and other prices tend not to fall at all.
More recently, the conflict with Iran has significantly disrupted global supplies and sent oil prices sharply higher. Once again, higher prices mean larger profits for U.S. oil companies while high gas prices and inflation squeeze working families. Some lawmakers, including Senators Sheldon Whitehouse and Bernie Sanders, are again calling for a windfall profits tax on fossil fuel companies. I support the idea, with one modification.
For the past decade, I have volunteered with Citizens’ Climate Lobby to help build support for bipartisan carbon fee and dividend legislation to address national economic, security, and pollution concerns. We should use this moment to turn fossil fuel windfalls into direct cash payments to Americans through a “windfall fee and dividend.” The fee should then gradually rise over time to capture the many co-benefits a cash-back polluter fee provides.
Under this approach, fossil fuel producers would pay a fee based on the climate pollution generated by the fuels they sell, with the revenue returned equally to all households in monthly cash-back rebates. A $100-per-ton carbon fee would normally add about $1 per gallon to gasoline prices. This is less than the increase consumers are already experiencing due to global supply disruptions, so doing it now would not be expected to change prices from today’s levels. Instead of that money becoming excess corporate profit, it would be returned equally to all American households — producing an estimated net annual after-tax income gain of roughly $500 for the average American household, even after accounting for today’s higher energy prices.
In addition to helping family budgets now, the policy would strengthen America’s economy and energy future. Economists across the political spectrum agree that price signals are the most efficient way to reduce pollution and accelerate clean energy investment. Current high fossil fuel prices are doing more to encourage electric vehicle adoption and energy efficiency than past subsidy programs.
A steadily rising federal carbon fee would unleash private-sector innovation and investment in clean energy technologies while helping the U.S. compete globally in the transition now being led increasingly by China and Europe. Thousands of U.S. economists from across the political spectrum have endorsed this market-based, revenue-neutral approach, and bipartisan carbon fee and dividend legislation was previously introduced in Congress.
Carbon fee and dividend also offers important trade advantages. Major trading partners, including the European Union, already impose significant carbon prices. Because the U.S. does not, American exporters increasingly face carbon border fees when selling energy-intensive products overseas. Aligning our carbon price with those of our trading partners would help American manufacturers compete both abroad and at home, allow U.S. exporters to avoid border adjustment fees and encourage countries without comparable carbon pricing to follow our lead.
Most importantly, this policy can endure politically because it directly benefits ordinary Americans. Families receive monthly cash-back dividends that put them ahead. U.S. businesses become more competitive internationally. Polluters, rather than taxpayers, bear the cost.
Families need immediate financial relief. We all need climate and energy policies that are economically sound, politically durable and capable of attracting bipartisan support. A windfall fee and dividend achieves all these goals. It will put money back into Americans’ pockets and help position the U.S. to lead the global transition to a cleaner and more competitive energy economy. To learn more about building political support for the fee and dividend solution, see carboncashback.org/political-will.