Analysis: Over the course of a year, between mid-February 2021 and mid-February 2022, the price of carbon more than doubled from $40 to $89.
That jump worked its way into household budgets sneakily – a 10 cent rise in the price of petrol, a higher carbon charge on home gas bills, a consideration when electricity companies did their annual rate hikes, a slight increase in the cost of fresh fruit and veggies which had to be trucked from farm to grocery store.
The price remained elevated throughout 2022, peaking at $88.50 in November. The Labour Cabinet, staring down the barrel of a tough election amidst skyrocketing living costs, found itself in a difficult position when the Climate Change Commission recommended Emissions Trading Scheme (ETS) settings which would allow the price to rise even further.
Ministers did what they are prone to do, when climate policies run crosswise with political realities. They ignored the commission (and Climate Change Minister James Shaw) and set price controls to arbitrarily depress the price.
The move worked and the carbon price collapsed – as did faith in the Government’s climate response and revenue for that response, which was sourced from ETS proceeds. Lawyers for Climate Action took the Government to court and it admitted it had made a mistake. The commission’s latest batch of advice will now be implemented in full, starting from the next carbon auction in December.
As part of its sprawling $14.6 billion tax plan announced on Wednesday, the National Party is promising to implement a “carbon dividend” to stop this from ever happening again. The scheme will redirect all future ETS proceeds to fund National’s tax bracket indexation, so there’s no political downside to a rising carbon price.
The only problem? Experts say National’s proposal isn’t a carbon dividend and it won’t take the political heat out of the carbon market.
“Bluntly said, no that is not a carbon dividend,” Sebastian Gehricke, the director of the Climate and Energy Finance Group at the University of Otago, told Newsroom.
He’s not alone in that assessment.
“The carbon dividend here that National is proposing is just using the ETS revenue for other purposes, it’s not providing a dividend back to households,” Eric Crampton, the chief economist at think tank the New Zealand Initiative agreed.
A true carbon dividend, Gehricke said, involves a direct payment to households sourced from some or all of the revenue from an ETS or carbon tax. As the price of carbon rises and people face a heftier bill at the pump, they can be reassured that their dividend will make up for it.
“Something on the order of 90 percent of the revenues that the Canadian government gets from its carbon tax are sent back to households in fairly equal split. It scales only with household size,” Crampton said.
“There, if carbon prices go up and households are feeling the crunch more because they’re paying more for things, the Canadian government can rightly say, ‘Well that’s why we’ve provided you a carbon dividend that gives you that money back’. In fact, over 80 percent of households get more back from Canada’s carbon dividend than they pay money in carbon taxes.”
Compare that to National’s plan, in which the benefits received by people don’t scale with the carbon price. If families are paying more at the pump, all National can do is say, “Well you’re paying less in tax than you otherwise would”.
The party’s finance spokesperson Nicola Willis did tell Newsroom she would want to put future rises in the price of carbon towards future tax cuts as well. National has pledged to review brackets every three years, but that still creates quite a degree of distance between the carbon price and the so-called dividend.
“It’s less simple than a carbon dividend really is,” Gehricke said.
“Even if ETS revenues follow the expected path, it will be harder for people to see the link,” Crampton said. “What they’ve really provided here is a partial inflation indexing of some of the income tax thresholds and some additional tax credits. There’s no real link between that and carbon prices.”
Even in ideal circumstances, people don’t always make the link.
Switzerland and Canada both have carbon tax-and-dividend schemes. In Switzerland, a survey found half of people were aware of the tax but only 15 percent knew about the dividend – making it difficult for the dividend to increase social licence for the tax. In Canada, the dividend was introduced some time after the tax, but public opinion for the tax didn’t change much afterwards.
Given that, the much more tenuous connection between ETS revenue and the tax bracket adjustments seems unlikely to sway anyone’s view on the rising carbon price.
There are two more issues here, too.
First, ETS revenue is expected to rise but then fall as the economy moves towards net zero and demand for carbon units fades. The tax adjustments are permanent, however, raising a question as to how future governments will make up the gap as carbon cash dwindles.
Second, that carbon money is already meant to go somewhere: New Zealand’s climate policies.
“It pisses me off to tell you the truth. It is not a climate dividend,” Shaw said. “What they’re doing is they’re taking the money that is set aside for action on climate change and they’re plowing it into a general tax cut. That incenses me because it’s completely irresponsible and it coopts the language of action on climate change to fund tax cuts.”
He called National “misleading” for saying the move is a carbon dividend.
Almost all of New Zealand’s climate actions, including the enormously effective Clean Car Discount, a range of walking and cycling projects and research on agricultural emissions are funded from ETS revenue.
National has taken aim at the Government Investment in Decarbonising Industry (GIDI) Fund, which provides big polluters with money to decarbonise.
“I think it’s a very confusing signal to say, ‘We’re pricing pollution more so that you get better internal business cases for doing decarbonisation initiatives but also we recognise that’s really hard so we’re going to use that revenue to pay you a cheque’. It diminishes the price signal from an economic perspective,” Willis said.
Crampton and Gehricke also shared their doubts that the industrial subsidies were value for money, with Crampton saying National’s policy was still an overall improvement on the status quo because it would end the GIDI Fund.
Still, with 27 years to go to reach net zero, there will be plenty of other climate policies still to come – something Willis readily conceded.
“We will be making climate change investments. We’re not taking the purist view that there’s no climate change investments the government should make. We do think there will be a case for investments in, for example, network infrastructure and emission reduction initiatives that stack up in terms of their abatement costs,” she said.
Under National, that money would come through the usual Budget process, a notion Shaw scoffed at.
“If anything, the last few years have shown us that actually the revenue that you’ve got coming in from the Emissions Trading Scheme itself isn’t adequate to the scale of the challenge,” he said.
“If we’re going to go further and faster than we have before, we’ve got to increase that. And actually the [Budget] allowances in the next few years are going to be pretty thin because of course revenue is down.”
Two particular big costs are adaptation and overseas carbon credits to meet New Zealand’s Paris target (which National has committed to meeting). An Environmental Defence Society report last year concluded managed retreat could cost $50 billion over the next half a century – that’s the size of the entire ACC fund. The Treasury estimated earlier this year that our Paris obligations could cost as much as $23.7 billion by just 2030.
For reference, operating allowances over each of the next three Budgets are well under $2 billion, alongside $3.1 billion in multi-year capital allowance. Those allowances will cover every policy in every sector that the next government wants to implement, so only a small proportion would be available for climate.