Canada offers New Zealand a lesson in how to manage carbon

Dr Eric Crampton
14 December, 2020

Canada’s carbon tax is set to rise from its current $30 per tonne ($33 NZD) to $170 per tonne ($188 NZD) by 2030. A credible price on carbon is the strongest commitment a country can make in reducing carbon emissions. But few in New Zealand would believe it possible to more than quintuple prices in our Emissions Trading Scheme (ETS) without political costs high enough to break the system.

How Canada is managing it provides a lesson for New Zealand’s ETS.

Canada’s federal government imposes a carbon tax in those provinces that have not established their own credible carbon tax system. Because of how Canada’s federal system works, the federal government simply imposing a tax on some provinces, but not others, would not work out very well. The federal government solved the problem in a rather ingenious way. It takes all of the carbon tax revenue raised from a province, puts it into a pot, and then gives it back to people in that province.

Provinces that produce more carbon emissions will pay more in carbon taxes. Households in those provinces then get a higher rebate payment back from the federal government. In Ontario, the first adult in a household receives an annual payment of $224. The second adult receives $112, and each child receives $56. The amount of the payment varies from province to province and will increase as the carbon tax rises.

This kind of rebate programme solves important equity problems. Richer households spend more money on everything, including on things that generate carbon emissions. A flat per-household payment funded by taxes disproportionately paid by richer households makes for a progressive transfer scheme.

And it also makes higher carbon prices politically possible. Most households will wind up receiving more back in carbon rebates than they will pay in carbon taxes. By 2030, the average family of four in Alberta will be receiving a carbon rebate amounting to about $3200 per year. Work by University of Calgary economist Trevor Tombe demonstrates that the vast majority of lower income households will receive far more in carbon rebates than they will ever pay in carbon taxes.

It might sound like a money-go-round, but it has a purpose. Carbon taxes encourage people to reduce their carbon footprint in whichever ways work best for them, both at home and in their businesses. But the rebate checks are based on the province’s overall emissions – not the household’s. Each household then has a strong incentive to cut back its own emissions. The rebate payments are then funded by households and industries that do less to pare back their own emissions.

New Zealand has an excellent Emissions Trading Scheme. But the ETS is hamstrung by a pervasive belief in government, and in the bureaus, that letting carbon prices rise to do the job would create overwhelming political backlash. So endless alternative schemes are proposed around things like subsidies for electric vehicles. Those schemes increase the cost of meeting New Zealand’s emissions targets, as compared to simply relying on the ETS, but they help to hide the cost.

But what if we thought a little differently about the ETS?

Every year, the government sells emissions credits into the ETS. So far, there has been no serious discussion about what should be done with the revenues collected at those ETS auctions. Why not create a carbon dividend?  

Every quarter, the government could tally up all of the revenue it raised by selling credits into the Emisisons Trading Scheme. It could take the raised funds, divide them up, and send each of us a carbon dividend payment.

Canada’s scheme sends more money to households in provinces with higher emissions. New Zealand’s could as well, though it would be a bit more technically complicated in tracking the locations where ETS credits were surrendered.

This kind of scheme fundamentally changes the politics around emission pricing.

Instead of simply going into general revenues, to be spent wherever the government saw fit, money raised by the government at ETS auction would provide a dividend payment to every Kiwi. If ETS prices went up, so too would each family’s carbon dividend. Professor Tombe’s analysis shows that lower-income families are most likely to see net benefits from this kind of scheme, but if numbers here were different, the system could easily be tweaked. Families with a Community Services Card could receive a higher payment, for example.

ETS carbon dividends and smarter ways of handling industrial ETS credit allocations would make it far easier to achieve Net Zero. If Canada has been able to figure out how substantially increase carbon prices and rebate the proceeds back to Canadian families, surely it is not beyond the wit of our bureaus to follow their lead.

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