Paths to Net Zero: Carbon dividends

Dr Eric Crampton
The Dominion Post
4 April, 2022

Last week might not have seemed the best time for a 25 per cent increase in Canada’s carbon tax. Fuel prices there, like here, have been increasing.

But Canadian Environment Minister Steven Guilbeault was able to remind Canadians that “eight out of 10 households in Canada are better off – they receive more money from our carbon price.”


Canada runs a carbon dividend. The country’s federal carbon tax is revenue neutral. Ninety percent of collected funds are rebated back to households.

Families then can decide how best to adjust to rising carbon prices, given their own unique circumstances. For some it might be an electric vehicle. For others, an e-Bike. Better insulation. A heating upgrade.

Carbon dividends like Canada’s enjoy strong support among economists here in New Zealand. When surveyed last month, not a single surveyed economic expert preferred policies like electric vehicle subsidies over a carbon dividend for mitigating the effects of rising carbon prices on poorer households.

Every family and every firm faces its own challenges and opportunities in dealing with rising carbon prices and in reducing emissions.

No size fits all. Prescribing one path for everyone – like an EV subsidy for a couple with a downtown apartment and no need for any kind of car – would be a serious error.

The same holds true on the other side of the ledger.

There are myriad paths between where we are now and Net Zero in 2050 and beyond. Some ways of mitigating net emissions are far more costly than others.

A carbon price, whether through an Emissions Trading Scheme or through a carbon tax, encourages everyone to find the most cost-effective ways of reducing net emissions. Carbon prices in New Zealand’s Emissions Trading Scheme currently sit at $75 per tonne and are expected to rise to $87 per tonne by 2026.

Few of us purchase commodities like copper and steel directly. But changes in the price of those raw materials feed through into consumer goods that rely on them. The price of those goods then tells each of us everything we need to know about the scarcity of the materials contained within them. We all adjust – often without even noticing it.

The same holds true with carbon prices. While few of us purchase emission credits directly, carbon costs work their way into fuel prices, into electricity prices, into the prices of goods forged with coal-fired smelters or grown in gas-heated greenhouses. Whenever it costs less than $75 to avoid a tonne of net emissions, there is strong incentive to do it.

Planting pine trees is currently very cost effective in reducing net emissions. But if councils or central government begin to restrict forestry conversion, the ETS simply encourages everyone to find the next best way of mitigating net emissions.

One part of the Climate Commission’s advice to the Government on its first emissions budgets, Ināia tonu nei, has consequently proved more than a little confusing.

The Commission’s modelling demonstrates that there are many ways of getting to Net Zero.

Economists tend to prefer relying on the Emissions Trading Scheme in the first instance and using other policies only when they address specific additional market failures.

Section 6.3 of the Commission’s report models what would happen under a $50 carbon price within the sectors currently covered by the ETS, if there were no restrictions on forestry conversions prior to 2050.

It shows that New Zealand can reach Net Zero by 2050 at the relatively low carbon price of $50/tonne. After 2050, there would be an increase in net emissions by 2065 “if there were no further forestry planting or policy changes.”

Many commentators have taken this section as suggesting that relying on the ETS would fail because of an increase in net emissions after 2050. Olivia Wannan notes that following that scenario “would violate the [Zero Carbon] Act, which requires all budgets after 2050 to also achieve net zero.”

But the scenario is simply a demonstration of the effects of a $50 carbon price in the sectors covered by the ETS. The modelling does not include the ETS’s cap on net emissions, and it does not allow carbon prices to change.

Under the continuation of current policies, the ETS’s binding cap would continue. If the cap is set at net zero from 2050, and further forest planting is not allowed, carbon prices would rise and the next most cost-effective ways of reducing net emissions would be found.

Using regulation to force emission reductions onto more costly paths makes it harder to reach Net Zero.

Letting emission prices guide New Zealand to net zero helps to find the best ways of getting there while generating the revenues that could fund a carbon dividend.

Those dividends can be important in maintaining support for higher emission prices.

Just ask Canada’s Environment Minister.

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