The Green’s carbon tax

The Greens have proposed scrapping, the ETS, replacing it with a carbon tax, and compensating for the carbon tax with a reduction in income and company tax.

Overall the policy appears to be credible, and has some merit to it. Let’s first look at the pros and cons of an ETS vs a carbon tax. Of course some people will say we should have neither, but they can go scream loudly somewhere else.

The ETS basically lets the market set the price of carbon. The idea is that as emissions rise, the price rises, and the greater the economic incentive to move to less carbon intensive activities – and the greater the incentive for tree planting etc which reduces net emissions.

But here’s the problem. With the global failure to get an agreement post-Kyoto on emissions reductions, the price of carbon has fallen significantly. Also the GFC lead to a decrease in global economic activity and emissions. So it is a fair criticism of the ETS that it no longer provides much of an incentive to reduce emissions. This is not a fault of the NZ Government, but of the reality of the international economy.

The current price is around $5 per tonne.

The Greens are proposing a simple tax at $25 per tonne, with agricultural emissions at $12.50 per tonne. This has the advantage of certainity. It will provide more of an incentive in the short term. However if there is a future global agreement, then a simple carbon tax may end up providing less of a price signal than an ETS. Also the ETS allows the allocation of free units to reduce over time, which can be an effective way to reduce emissions.

It is positive that the Greens are not proposing a carbon tax as a way to just increase revenue for the Government. Their proposed tax cuts of no tax on the first $2,000 of income and a one cent reduction in company tax to 27% is welcome and does make the package relatively cost neutral.

My concern is that Governments in the future would increase the level of the carbon tax, with no corresponding income or company tax reductions. So would the level of the tax be something that only Parliament can change (like most taxes) or something that the Greens would allow the Government to alter in future.

The other issue is the wisdom of taxing agriculture when no other country does this, and in the absence of an international agreement or any significant way to reduce emissions short of just having fewer cows. I think at some stage agricultural emissions should be priced, but if we are the only country in the world doing so – then we may just export jobs and income to other countries.

But overall the proposed carbon tax does have some merits over the current ETS. If NZ does proceed with one, then there is a good way to set the price which may please both sceptics and non-sceptics. Tie the level of the tax to the mean global temperature. That way the level of the tax only increases if the mean global temperature increases. That way future Governments can’t use it as a cash cow.