A cash dividend sounds good but has some big economic and behavioural drawbacks, says Bernard Hickey. The solution? Vouchers.

This is an edited version of a post first published on Bernard Hickey’s newsletter, The Kākā.

The Ministry for the Environment is reportedly looking at a ‘carbon dividend’ scheme that would recycle cash from the Emissions Trading Scheme (ETS) back into the pockets of consumers. That would be popular at a time when many are struggling with living costs, especially if it was done with a simple equal cash payout to residents.

I get it. The idea of cash in the hand feels good and even fair in a cost of living crisis, especially if it effectively saw richer petrol and diesel buyers subsidising payouts to poorer drivers who haven’t bought so much petrol. Act and the Greens have both supported so-called carbon dividends in different forms at different times.

Carbon dividends are also popular among those who advocate for a hard-line form of the ETS that includes all emissions and simply squeezes prices higher until we hit our targets. Canada has a carbon dividend where up to 17% of revenues from a carbon tax are paid back as an annual cash dividend of C$193.50 (NZ$230) per adult and C$56.50 (NZ$67) per child.

But such a policy would also be inflationary and work against the emissions reductions aims of the ETS, given many consumers would buy more emissions-creating goods and services with the cash.

Recycling ETS cash into emissions cuts here

A big climate liability is building up for Aotearoa because we are behind the trajectory needed to meet our Paris agreement commitments to reduce emissions by 30% from 2005 levels by 2030. It’s getting close now.

Treasury has already estimated the Crown may have to spend between $3.3 billion ($660 per person) and $23.7 billion ($4,740 per person) on emissions credits overseas for Aotearoa to meet our Paris commitments by 2030, depending on the carbon prices at the time, which Treasury estimated at between $44/tonne to $224/tonne

But what if we used those billions to ‘buy’ emissions reductions here in New Zealand, rather than spending them overseas? It would mean saying to individuals, families, companies, councils and government departments that they should work out how to reduce emissions, work out what the cost would be, and then offer those tonnes up to the government for cash. That would imply a quite extensive process of proving a particular action or technology would reduce a certain number of tonnes of emissions, and then proving it had been done.

Show us the list. You’ve built a list, right?

A better way would be for the government to work out what actions or purchases produce the most emissions reductions the fastest, and for the least amount of money. Some of those interventions would require some government investment, for example reconfiguring roads to walkways and cycleways. Some would be costless in a financial sense in that they would not involve a specific investment, but created a non-financial cost for some, such as lengthening commuting times.

There should be a long list built up within and outside government that ranks the scale of the emissions reductions, and the speed and the cost of obtaining them. We can get a sense of how this is being done up and down the country by looking at the announcement that the government would buy 800,000 tonnes of reductions per year from NZ Steel for $130 million, or an effective cost of $16.20 per tonne. That seems a fair price given we have been looking at spending up to $224/tonne overseas.

We also know the government decided not to go ahead with the cash-for-clunkers scheme earlier this year, partly because the $569 million cost to get dungers off the road would have only generated up to 4,500 fewer tonnes of emissions, meaning the ‘cost’ of the reductions worked out at around $126,444 per tonne. That’s a bit too high.

So what is in between? How many tonnes would I save by cycling everywhere instead of using a car? How many tonnes are saved per electric bus operating in Auckland? It’s about time we made a list. The government would then be in a position to save money in the long run by spending less on reducing emissions here to meet our Paris targets, compared to $23.7 billion on buying credits offshore.

If for example, the government can ‘buy’ tonnes of forgone emissions from NZ Steel at $16.20/tonne, why can’t it ‘buy’ my forgone emissions from commuting? I’ve worked out I’ll save about 3.3 tonnes a year of emissions by not commuting by car or flying around the country for work. In theory, I could ‘sell’ that change in my behaviour to the government for the next six years to 2030 for $320 for my forgone 19.8 tonnes, assuming a $16.20 price. That’s probably too low a price, given carbon prices here got up to almost $90 a tonne late last year, before crashing to $53 now. At $90 a tonne, I’d be getting $1,782 for my six years of behaviour. That’s becoming meaningful.

Rather than checking on me every year to prove I’m not driving and flying, another way is to simply give me a voucher for $1,782 to reduce the cost of buying an electric bike. Or swapping an electric bike for an old dunger of a car I know is worth less than $1,782, which most of them are.

It’s amazing what we’ll do for a ‘deal’

This is where these sorts of vouchers become useful and fair. They can be used to buy a reliable amount of emissions reductions that don’t have to be verified after the fact, and the money can’t be used to just go out and buy a bigger car with a bigger engine, or a holiday that adds tonnes of emissions.

The purists would say the ETS price or a carbon tax would do this much more simply and cheaply. I’d be incentivised to stop driving and flying because the ETS or carbon tax component of the cost would become prohibitive. Fair enough. The trouble with that system is those who can least afford to pay and can’t change suddenly have to pay much more. It also increases inflation and does nothing to create a just transition that spreads the costs from poor to rich and from old to young.

Sometimes we also like to collect a voucher to save money. There’s something about the quest for discounts that harnesses some behavioural economics juju. E-bike vouchers and public transport discounts have been effective overseas. But it’s surprising to me that we all haven’t tried to work out the costs and benefits of reducing our emissions, collectively and personally, in a way that reduces the long-run cost by reducing the long run liability.

Where’s the list? Perhaps we should start building one ourselves to encourage the government to get on with picking the cheapest, biggest and fastest emissions reductions to close our Paris deficit by the required 100 million tonnes over the next six years.

Follow Bernard Hickey’s When the Facts Change on Apple Podcasts, Spotify or your favourite podcast app.