Peace Dividends and Carbon Dividends

Dr Eric Crampton
Insights Newsletter
31 August, 2023

At the end of the Cold War, western governments substantially reduced military expenditure. US President Bush and UK Prime Minister Thatcher called it the “peace dividend.”

It was not a “dividend” in any normal sense of the term. It only meant that instead of spending money on bombs and planes, governments could reduce taxes or fund other expenditures. No one received a dividend cheque.

This week, in a similar vein, National proposed a ‘carbon dividend’.

Currently, ETS revenues fund industrial subsidies that can actively discourage companies from investing in decarbonisation. Rising carbon prices should provide all the incentive needed for those investments. But delaying investment in the hope of drawing subsidies can be all too tempting.

Rather than wasting ETS revenues on industrial subsidies, a National-led government would use those revenues to help fund tax credits and tax reductions.

The economic case for raising revenue through carbon charges rather than taxes on income is straightforward. Most taxes cause economic distortions. Carbon taxes, or ETS charges, reduce them.

While National’s proposal is better than the status-quo, it remains a missed opportunity.

The Initiative has proposed carbon dividends that mirror Canada’s system. The Canadian government returns almost all carbon tax revenue directly to households, with carbon dividend payments scaling with household size.

Canada’s carbon tax and dividend scheme is progressive. High income households pay the most in carbon charges, but revenues are divided more equally.

If rising prices hit household budgets, Canada’s Environment Minister can remind everyone that over 80% of households receive more in carbon dividends than they pay in carbon taxes.

That helps maintain support for rising carbon prices.

A government running National’s scheme would have a much harder time. If carbon prices rose quickly and hit household budgets, the proposed tax package would not flex. A proper carbon dividend would.

The ACT Party’s carbon dividend policy is much closer to the Initiative’s longstanding proposal.

Unfortunately, carbon revenues run dry when the government stops auctioning ETS credits. A real carbon dividend can only help households transition to a higher carbon cost world, before ending.

National’s proposal, then, poses a problem for future governments. When ETS revenues run out, other adjustments to tax or spending will be needed.

Not having to spend money on bombs, or on industrial subsidies, is excellent.

But National missed a chance to align more closely with its potential coalition partner’s better policy

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