A carbon dividend takes the revenue from auctions of emissions units for the ETS and gives it back to households. This year, the sale of emissions units will raise around $1.3 billion.* That is around $750 per household.

The following two charts show a) low-income households spend more of their incomes on carbon than other households, but b) have a smaller carbon footprint.

Source: Figure 4.3, Report 2.

Source: Figure 4.2, Report 2.

The charts come from a UK analysis by the London School of Economics. I know of no equivalent analysis for New Zealand, although these findings from Infometrics appear consistent.

So what does this mean?

Carbon pricing is generally thought to be regressive because low-income households spend a higher share of their incomes on goods and services which produce or lead to emissions.

However, a carbon dividend reverses this, making carbon pricing progressive. Giving households the revenues from the sale of emissions units disproportionately benefits low-income households. This is because their absolute carbon footprint is smaller than other households, meaning less exposure to the carbon tax, but dividends are paid on (something like) a flat rate.

Studies find different carbon dividends are progressive under most allocation rules, including a simple flat payment per person. Here is a list of studies on the equity effects of carbon dividends.

Studies also find that carbon dividends mean carbon pricing overall is a net benefit for a majority of households. The mid-range estimate seems to be around 60% of households. Low-income households benefit the most from a dividend: one of the studies, from the US, estimates 84% of low-decile households would receive a net benefit from carbon pricing after a dividend payment.

So if you are worried about protecting the most vulnerable households from the costs of lowering emissions – and many who work on climate change say they do – then a carbon dividend should be attractive to you.

On the other hand, if you are concerned about whether it will be possible set a carbon price that is high enough to achieve emissions targets without compromising popular support, then a carbon dividend should be attractive to you. A carbon dividend allows governments to go faster and harder on raising the carbon price, since payments back to households are shelter from higher power bills and petrol prices that necessarily follow from pricing carbon. The fact that dividend means most households win from carbon pricing, with the largest proportionate benefits going to those on low incomes, should increase voters’ tolerance for aggressive efforts to lower emissions.

So, a carbon dividend ticks a lot of boxes.

Naturally, the government has all-but ruled out a dividend. One the few concrete new policies in last week’s Emissions Reduction Plan was to dismiss the dividend idea. Here is what the government said (pp. 34-35):

Given the breadth, scale and duration of the transition to low-emissions economy, we need to ensure adequate, durable and certain public funding for climate action. The Treasury and the Ministry for the Environment are currently considering how the public finance system can provide this, including:

…

4. how we can recycle revenue from the New Zealand Emissions Trading Scheme (NZ ETS) into climate spending.

I understand James Shaw has subsequently confirmed no dividend.

Next time you hear Shaw or the PM or any other minister talking about a “climate crisis” or “climate justice,” keep in mind that they have ruled out about the closest thing you can find to a magic bullet in climate change policy. The one thing, other than a carbon price, that could do more to cut emissions and protect the most vulnerable, simply and easily, than anything else.

That’s what they rule out first.

* Excluding revenue from the sale of 1.6 million “backed” units. These are additional units, issued and sold at the auction on 1 September to defend the ETS price cap. Backed units have to be offset by the government in some way such that they do not raise global emissions.