Why have a dividend in a carbon price?
A dividend paid to households does much more for carbon pricing than making it more popular with voters; it engages citizens in the process of decarbonising our economy, it makes it more just and equitable, and it makes it more efficient.
Carbon taxes are considered by many economists to be the most efficient way to reduce carbon emissions. See Why do we need a carbon price in Australia? A predictably rising tax on fossil fuels, at source, can do much of the heavy lifting needed to drive a steady and orderly transition to a decarbonised economy.
Taxes also have an advantage over emissions-trading or cap-and-trade systems, well-described in our Carbon Fee versus Cap and Trade Laser Talk.
All carbon pricing systems raise the issue of what to do with the revenue. There are 3 main options -
Government spends it as it wishes, preferably on emission reduction initiatives, renewable energy, EV subsidies, etc
Government recycles it through tax cuts, subsidies to low-income families, etc
An agency at arms length from government returns it equally to citizens as a monthly dividend
CCL has long advocated for the monthly dividend for the following reasons:-
Resilience - taxes are generally unpopular and are easily targeted in political debate. Various studies have found that the dividend only makes a marginal difference to people’s willingness to support a carbon tax, but once it is in place it becomes more popular and harder to undermine. For example, a carbon tax in British Columbia has been in place over a decade, is relatively popular and is now at $50/ton. Canada's 'federal backstop' fee and dividend policy has survived 2 elections and a high court challenge and is now set to rise well beyond the original $50/tonne target
Boosting the Economy - taxes tend to slow the economy due to the lag between their collection and being returned to the economy. Dividends inject the revenue straight back into the economy and boost consumer spending in the same way that Covid stimulus payments did.
Citizen engagement - most people will spend their dividends on increasingly cheaper low-carbon living as the predictably rising tax will increase the cost of high-carbon goods and services - this enables citizens to actively participate in decarbonising the economy.
Justice and Equity - the dividend makes it possible for people on low incomes to manage the increase in living costs due to the carbon fee. It ensures those with the largest carbon footprints pay more into the system, while those with below-average footprints pay less
Redirecting fossil fuel subsidies - a carbon tax internalises the social costs of fossil fuels; i.e. the costs of the damage they cause to the environment, the economy and to human health. Being allowed to pollute for free is an ‘implicit’ subsidy and makes fossil fuels artificially cheap and ensures that they will be produced and consumed for many more decades. They consume a large amount of the finance needed for research and innovation in the zero carbon industries that are required for the transition to a decarbonised economy. See Fossil Fuel Subsidies in Australia
These implicit subsidies (≈ $50bn/year), combined with ‘explicit’ subsidies from government (≈ $10.3 bn/year) are a carbon price in reverse - taxpayers are subsidising fossil fuel companies and enabling them to delay the transition to zero-carbon energy sources.
The carbon tax internalises the costs of fossil fuels into their price, makes explicit subsidies pointless and redirects finance towards zero carbon technologies. By spending their dividend on low-carbon living as it becomes cheaper, citizens give business and industry further incentive to decarbonise thus creating a virtuous cycle of decarbonisation.
Efficiency - Some estimate that a carbon price needs to rise to well over $100/tonne to be effective. This would raise living costs impossibly high for low income households. Canada’s carbon price is set to rise to $170/ton by 2030. The dividend makes it possible for the price to rise high enough to be effective.
A climate dividend will cover all fossil-fuel-derived emissions across most of the economy (77% of Australia’s emissions come from fossil fuels) and its simplicity eliminates loopholes and gaming. Once established, the carbon fee steadily reduces emissions and drives the transition with little extra effort needed from the government until its job is done (i.e. emissions have fallen to 90% below 1990 emissions). The dividend keeps the economy moving and keeps the electorate onside.
In summary, Climate Dividends is an elegant policy instrument that puts a predictably rising fee on the carbon pollution contained in fossil fuels, phases out the market-distorting subsidies and actively engages citizens in the process of decarbonising the economy.
