An Economic Assessmentof a Carbon Dividend in
New Zealandfor Citizens’ Climate Lobby
New ZealandMarch 2021

AuthorshipThis report has prepared by Adolf Stroombergen .

Email:
adolf.stroombergen@infometrics.co.nz

All work and services rendered are at the request of, and for the purposes of the client only. Neither
Infometrics nor any of its employees accepts any responsibility on any grounds whatsoever,including negligence, to any other person or organisation. While every effort is made by Infometrics
to ensure that the information, opinions, and forecasts are accurate and reliable, Infometrics shallnot be liable for any adverse consequences of the client’s decisions made in reliance of any reportprovided by Infometrics, nor shall Infometrics be held to have given or implied any warranty as towhether any report provided by Infometrics will assist in the performance of the client’s functions.

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Carbon Dividend – March 2021

Table of contents
1. Introduction & Summary .......................................................... 4
2. Methodology ............................................................................... 5
ESSAM Model ............................................................................................................................... 5

3. Carbon Dividend Scenario ....................................................... 7
Input Assumptions ...................................................................................................................... 7
Output ............................................................................................................................................ 8
Carbon Dividend.......................................................................................................................... 9

Appendix A: ESSAM Model........................................................... 11
Model Structure .......................................................................................................................... 11

Appendix B: Carbon Dividend ..................................................... 15

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1. Introduction & Summary
Infometrics has been requested by Citizens’ Climate Lobby New Zealand to undertake aneconomic assessment of a proposed Carbon Dividend. Broadly speaking the proposal is torecycle the revenue from a price on GHG emissions (whether via a tax or emissions trading
scheme) back to households in the form of a uniform divided per adult and a lower
amount per child.
The premise underlying the proposal is that high carbon prices such as those that emerge
from some of the modelling by the New Zealand Climate Change Commission are unlikely
to be acceptable to the community unless it can be demonstrated that most people will
not be worse off.
The results of the modelling reveal that by 2050 New Zealand’s CO2 emissions decline by
25% relative to a ‘Reference’ scenario. Real private consumption increases by 1.9% andeach adult receives a carbon dividend of more than $1000 per year. In addition adisproportionate share of the benefits goes to lower income households.

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Carbon Dividend – March 2021

2. Methodology
We use the ESSAM general equilibrium model of the New Zealand economy to investigate
the national costs and benefits of applying a high price on greenhouse gas (GHG)
emissions and recycling the resulting revenue back to households in the form of a percapita dividend. Details of the proposed scheme are presented in the next section.

ESSAM Model
The ESSAM (Energy Substitution, Social Accounting Matrix) model is a multi-industry
computable general equilibrium (CGE) model of the New Zealand economy. An outline isprovided in Appendix A.
As with any model, CGE models can only approximate the highly complex real economy.
Therefore the results can only ever be indicative. The interpretation of CGE results should
centre on their direction (up or down) and broad magnitude (small, medium or large),
rather than on the precise point estimates that the model produces. Essentially we aremodelling scenarios: such modelling “does not predict what will happen in the future.
Rather, it is an assessment of what could happen in the future, given the structure of themodels and input assumptions.”1

Reference Scenario
The model is used to produce a Reference scenario for 2050. It is similar to the CPR
scenario in the Climate Change Commission’s report 2, but with a slightly higher carbon
price to acknowledge the likelihood that the price will rise from its current $35 or so per
tonne of CO2e. Nevertheless the scenario is a theoretical construct of what the economy
could look like at a future point in time with the continuation not only of existing policies,
but also of other trends such as falling prices of electric vehicles, and without any large
exogenous economic shocks. The function of the Reference scenario is to act as a point ofcomparison against which other scenarios can be compared.
Two key assumptions for the Reference scenario and all other scenarios are:1.

New Zealand population is projected to be 6.2 million in 2049/50. (StatsNZ 50th
percentile).

2.

Real oil price in 2049/50: US$80/bbl.

More detail on the assumptions is given in the section on scenario specification.

Model Closure
The following model closure rules are adopted for the alternative scenarios, consistent withgenerally accepted modelling practice:1.

The current account balance is fixed as a percentage of GDP. This means forexample that if New Zealand needs to purchase international emissions units to

1 Australian Treasury. (2008). Australia’s low pollution future: the economics of climate change mitigation. Online at

http://www.treasury.gov.au/lowpollutionfuture/report/default.asp
2 https://www.climatecommission.govt.nz/get-involved/our-advice-and-evidence/

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Carbon Dividend – March 2021

meet an emissions responsibility target, that liability cannot be met simply byborrowing more from offshore with indefinitely deferred repayment.
2.

The post-tax rate of return on investment is unchanged between scenarios. Thisacknowledges that New Zealand is part of the international capital market andensures consistency with the preceding closure rule.

3.

Any change in the demand for labour is reflected in changes in wage rates, notchanges in employment. This prevents the long run level of total employment
being driven more by emissions policy than by the forces of labour supply anddemand, which we consider unlikely.

4.

The fiscal balance is fixed across scenarios. This means for example that if thegovernment needs to purchase overseas emission units it must ensure that it has
matching income. If it earns insufficient income from the sale of domestic emission
units (because of free allocation for example) it would have to adjust tax rates.
Generally net household effective income tax rates are the default equilibrating
mechanism, although changing government expenditure or other tax rates arealternative options that may also be used.
In the Carbon Dividend scenario the equilibrating mechanism is the value of thedividend.

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3. Carbon Dividend Scenario
Aligning the modelling to that published by the Commission has proved tricky, partly
because the scenarios in the report are produced by the partial equilibrium ENZ model but,apart from the Current Policy Reference (CPR) scenario, have no corresponding scenario in
the C-PLAN general equilibrium modelling – and even there are differences.
Emissions in our Reference scenario are somewhat lower than in the Commission’s CPR
scenario owing to our assumption of an $80 price on long-lived gases rather than the $35
used by the Commission, which seems particularly low for 2050, even for Reference
scenario.
Our second scenario is close to the Commission’s TP1 and TP2 scenarios produced by the
C-PLAN model.

Input Assumptions
In the Reference scenario for 2050 there is a modest carbon price of $80/tonne CO 2e forlong lived gases and no price on biogenic methane (CH4). Although this scenario is notintended to exactly replicate the Commission’s CPR scenario, it does include a number ofidentical exogenously stipulated features from the ENZ model, the most significant of
which are:•

Progressive penetration of electric vehicles (without any explicit policy changes).

•

Closure of methanol production and aluminium smelting.

•No growth in steel production.

•

No domestic oil refining.

•More electricity generation from renewable sources, but some gas for dry years or
peak demand.

•

Reduction or limited increase in cattle and sheep numbers.

A second scenario, the Carbon Dividend scenario, is designed to meet the government’s
net zero target for long-lived gases (CO2 and N2O) by 2050, by whatever carbon price isrequired. This is denoted as the ETS1 price. A lower price is assumed for biogenic methane,
also with the aim of meeting the target of 24-47% below 2017 by 2050. This is denoted as
the ETS2 price.
The other key difference between the two scenarios is that in the Reference scenario
revenue from the ETS is allocated to general government consumption (so not includingtransfers), after payment for any international emission units needed to meet New
Zealand’s Nationally Determined Contributions. In contrast under the Carbon Dividend
scenario most of the ETS revenue is available to allocate to households as a carbon
dividend.
The key input assumptions are summarised in Table 1. In the Commission’s modelling with
C-PLAN, in scenarios T1 and T2, the price under ETS1 is around $337, while the ETS2 priceis around $53. All carbon prices are expressed in 2020 dollars.

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Carbon Dividend – March 2021

Table 1: Input Assumptions for 2050

ETS1 priceETS2 priceInternational priceETS recycling
Net forestry

Reference scenario
$80
$0
$250
mostly to govt spending &purchase of international units-19.5Mt

Carbon Dividend scenario
$400
$50
$250
mostly to household dividend-19.5Mt

Output
The main results are summarised in Table 2. They demonstrate that a high price on longlived gases plus revenue recycling to households, does not entail a macroeconomic costand may indeed produce a macroeconomic benefit. Although GDP declines slightly relative
to Reference, this is more than offset by the increase in real gross national disposable
income. The latter is a better measure of economic benefit than GDP as it allows forchanges in the terms of trade (a higher price for a tonne of milksolids means we can buy
more imports) and for changes in payments for overseas emission units. 3
With no need to purchase international units, more of the nation’s income is available fordomestic consumption which increases by 1.9% over the reference scenario. In otherwords, the average household obtains 1.9% more goods and services.
Table 2: Summary of Model Output

Private Consumption
Exports
Imports
GDP
RGNDI
Total CO2e
Biogenic CH4Long-lived CO2e

Carbon Dividendv Reference
1.9%
-4.5%
-1.0%
-0.2%
0.8%

Notes

less required to pay for overseas units-25.1%-9.3%-38.6%

43.1 Mt v 57.6 Mt in Reference scenario
24.0 Mt v 26.5 Mt
19.1 Mt v 31.1 Mt

Two caveats should be noted:
1.

It is possible that aligning the domestic carbon price with the international carbon
price would generate an even more favourable macroeconomic picture, but ourintention with the Carbon Dividend scenario is to be consistent with theCommission’s other scenarios – namely to achieve net zero in long-lived gases
without purchasing international units.

2.

The macroeconomic effects might also be more favourable if the higher carbon
price leads to additional technological advances such as a methane vaccine or
cement production without CO2 emissions. No such innovations have been
assumed so as to maintain a cleaner comparison with the Reference case.

3 Technically emissions units may be treated as a stock (asset) rather than a flow, but this does not change the essenceof the argument, given the closure assumptions.

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Carbon Dividend – March 2021

Carbon Dividend
In the Carbon Dividend scenario the revenue available for a dividend in 2050 is $6200m (inconstant 2020 dollars) . Allocation could be as follows:•

The projected population in 2050 (Stats NZ; 50 th percentile) is 6.20m, of which,oUnder 18 years of age: 1.15mo18 years and over: 5.05m•

So assuming that those under 18 get 50% of the adult dividend, the adult dividend
is $1100 per annum. (An alternative option is pay 50% to dependent children, but asimple age boundary is operationally more straightforward).

•

The implied average dividend per household is about $2400, allowing for people
who do not live in private households, for example those in residential care homes.

Figure 1 illustrates the allocation of the dividend by household income quintile comparedto the quintile shares of total income in the Reference scenario.
Figure 1: Incidence of Carbon Dividend and Reference Scenario
Income by Household Income Quintile
45.0%
40.0%
35.0%

Reference Scenario Income Shares
Allocation of Carbon Dividend

30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Q1

Q2

Q3

Q4

Q5

Bearing in mind that the number of people in each quintile increases through the quintiles,
the Carbon Dividend shows a marked distributional effect. For example the lowest quintile(Q1) has 6.4% of all household income, but 12.7% of the dividend. In contrast the top
quintile (Q5) has 42.1% of all household income, but only 25.9% of the dividend.
A carbon price of $400/tonne would raise the price of petrol by about 97c/litre. From themodel’s results it is estimated that Q1 households would spend about $94m (excluding tax)
on petrol and diesel (in 2050) in the Carbon Dividend scenario. However, this is more thanabsorbed by the approximately $780m that Q1 households would receive from the Carbon
Dividend.

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Comment
The core message from these results is that increasing the carbon price and recycling therevenue through a Carbon Dividend produces a small increase in national income and an
associated improvement in economic wellbeing. The social/political message (which cannot
be demonstrated with a general equilibrium model) is that to secure community buy-in fora high carbon price and lower emissions, people have to see that it is not about making
them poorer and that the impacts are equitable.
The point of a carbon price is to change relative prices in favour of low carbon goods andservices. This should not make consumers worse off (or at least minimise any loss) and one
way to ensure that is via a lump sum dividend. An additional benefit is that it assists thosewith lower incomes, meeting the government’s aim of a ‘just transition’.
Furthermore, a price on carbon should not be an excuse to increase government spending.
If there is a case for that, other funding mechanisms should be analysed so that themechanism of a carbon price is not further complicated by political taxation considerations.

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Appendix A: ESSAM Model
The ESSAM (Energy Substitution, Social Accounting Matrix) model is a general equilibrium
model of the New Zealand economy. It takes into account the main inter-dependencies inthe economy, such as flows of goods from one industry to another, plus the passing on ofhigher costs in one industry into prices and thence the costs of other industries.
The ESSAM model has previously been used to analyse the economy-wide and industry
specific effects of a wide range of issues. For example:•

Analysis of the New Zealand Emissions Trading Scheme and other options to
reduce greenhouse gas emissions•

Changes in import tariffs•

Public investment in new technology•

Funding regimes for roading and wider economic benefits•

Release of genetically modified organisms

Some of the model’s features are:•55 industry groups, as detailed in the table below.

•

Substitution between inputs into production - labour, capital, materials, energy.

•

Four energy types: coal, oil, gas and electricity, between which substitution is also
allowed.

•Substitution between goods and services used by households.

•

Social accounting matrix (SAM) for tracking financial flows between households,
government, business and the rest of the world.

The model’s output is extremely comprehensive, covering the standard collection ofmacroeconomic and industry variables:•

GDP, private consumption, exports and imports, employment, etc.

•

Demand for goods and services by industry, government, households and the restof the world.

•

Industry data on output, employment, exports etc.

•

Import-domestic shares.

•

Fiscal effects.

Model Structure
Production Functions
These equations determine how much output can be produced with given amounts of
inputs. For most industries a two-level standard translog specification is used which
distinguishes four factors of production – capital, labour, and materials and energy, withenergy split into coal, oil, natural gas and electricity.

12 Carbon Dividend – March 2021
Intermediate Demand
A composite commodity is defined which is made up of imperfectly substitutable domestic
and imported components - where relevant. The share of each of these components isdetermined by the elasticity of substitution between them and by relative prices.

Price Determination
The price of industry output is determined by the cost of factor inputs (labour and capital),domestic and imported intermediate inputs, and tax payments (including tariffs). World
prices are not affected by New Zealand purchases or sales abroad.

Consumption ExpenditureThis is divided into Government Consumption and Private Consumption. For the lattereight household commodity categories are identified, and spending on these is modelledusing price and income elasticities in an AIDS framework. An industry by commodity
conversion matrix translates the demand for commodities into industry output
requirements and also allows import-domestic substitution.
Government Consumption is usually either a fixed proportion of GDP or is set exogenously.
Where the budget balance is exogenous, either tax rates or transfer payments are assumed
to be endogenous.

Stocks
The industry composition of stock change is set at the base year mix, although variation ispermitted in the import-domestic composition. Total stock change is exogenously set as aproportion of GDP, domestic absorption or some similar macroeconomic aggregate.

Investment
Industry investment is related to the rate of capital accumulation over the model’s
projection period as revealed by demand for capital in the horizon year. Allowance is madefor depreciation in a putty-clay model so that capital cannot be reallocated from one
industry to another faster than the rate of depreciation in the source industry. Rental rates
or the service price of capital (analogous to wage rates for labour) also affect capitalformation. Investment by industry of demand is converted into investment by industry of
supply using a capital input- output table. Again, import-domestic substitution is possible
between sources of supply.

Exports
These are determined from overseas export demand functions in relation to world prices
and domestic prices inclusive of possible export subsidies, adjusted by the exchange rate.
It is also possible to set export quantities exogenously.

Supply-Demand Identities
Supply-demand balances are required to clear all product markets. Domestic output must
equate to the demand stemming from consumption, investment, stocks, exports andintermediate requirements.

Balance of Payments
Receipts from exports plus net capital inflows (or borrowing) must be equal to payments
for imports; each item being measured in domestic currency net of subsidies or tariffs.

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Factor Market Balance
In cases where total employment of a factor is exogenous, factor price relativities (forwages and rental rates) are usually fixed so that all factor prices adjust equi-proportionallyto achieve the set target.

Income-Expenditure Identity
Total expenditure on domestically consumed final demand must be equal to the income
generated by labour, capital, taxation, tariffs, and net capital inflows. Similarly, income andexpenditure flows must balance between the five sectors identified in the model –business, household, government, foreign and capital.

Industry Classification
The 55 industries identified in the standard ESSAM model are defined on the following
page. Industries definitions are according to Australian and New Zealand Standard
Industrial Classification (ANZSIC06).

Input-Output Table
The model is based on Statistics New Zealand’s latest input-output table which relates to
2012/13.

14 Carbon Dividend – March 2021
Model Industries
Abbrev
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55

HFRG
SBLC
DAIF
OTHF
SAHF
FOLO
FISH
COAL
OIGA
OMIN
MEAT
DAIR
OFOD
BEVT
TCFL
WOOD
PAPR
PRNT
PETR
CHEM
FERT
RBPL
NMMP
BASM
FABM
MAEQ
OMFG
EGEN
EDIS
WATS
WAST
CONS
TRDE
ACCR
ROAD
RAIL
WATR
AIRS
TRNS
PUBI
COMM
FIIN
HIRE
REES
OWND
SPBS
OBUS
GOVC
GOVL
SCHL
OEDU
MEDC
CULT
REPM
PERS

Description
Horticulture and fruit growing
Sheep, beef, livestock and cropping
Dairy and cattle farming
Other farming
Services to agriculture, hunting and trapping
Forestry and logging
Fishing
Coal mining
Oil and gas extraction, production & distribution
Other Mining and quarrying
Meat manufacturing
Dairy manufacturing
Other food manufacturing
Beverage, malt and tobacco manufacturing
Textiles and apparel manufacturing
Wood product manufacturing
Paper and paper product manufacturing
Printing, publishing and recorded media
Petroleum refining, product manufacturing
Other industrial chemical manufacturing
Fertiliser
Rubber, plastic and other chemical product manufacturingNon-metallic mineral product manufacturing
Basic metal manufacturing
Structural, sheet and fabricated metal product manufacturing
Machinery and other equipment manufacturing
Furniture and other manufacturing
Electricity generation
Electricity transmission and distribution
Water supply
Sewerage, drainage and waste disposal services
Construction
Wholesale and retail trade
Accommodation, restaurants and bars
Road transport
Rail transport
Water transport
Air Transport
Transport services
Publication and broadcasting
Communication services
Finance and insurance
Hiring and rental services
Real estate services
Ownership of owner-occupied dwellings
Scientific research and computer services
Other business services
Central government administration and defence
Local government administration
Pre-school, primary and secondary education
Other education
Medical and care services
Cultural and recreational services
Repairs and maintenance
Personal services

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Appendix B: Carbon Dividend
The proposal is that the Carbon Dividend is allocated uniformly to every adult aged 18
years and over, with those under 18 receiving 50% of the adult amount. The
disaggregation of the household sector in the model is limited to income quintiles, so it isnecessary to estimate how the dividend allocation rule maps to household income
quintiles.
Table B1 is estimated using data from three sources; the 2018 Census, the 2016 Household
Economic Survey and a customised table from the 2017 Household Net Worth Statistics, allfrom Statistics New Zealand. The projected age distribution of the population in 2050 isallocated to household income quintiles according to the 2017-18 age-by-income quintile
distribution.
Note that about 12% of the population is not resident in private households.
Given the aging of the population and smaller families, there will likely be smaller
households by 2050, but any effect on the dividend shares is not readily apparent.
Table B1: Allocation of the Carbon Dividend
Q1
Q2
No. people in households in 2018
No. Children
90
143
No. Adults
434
585
Total number
524
729

Q3

Q4

Q5

All

218
673
891

265
755
1020

309
827
1136

1025
3275
4300

Children weighted at 50% in 2018
Total number
479
657
Shares
12.7%
17.3%

782
20.6%

888
23.4%

982
25.9%

3787
100.0%

Reference scenario
Income shares

17.2%

22.1%

42.1%

100.0%

6.4%

12.1%