Brian Fallow: Carbon tax policy classic Greens

Russel Norman says taxpayers are subsidising polluting industries without realising it. Photo / APN

Norman wants to shift burden away from household incomes and business profits and on to polluters.

The Greens are open to negotiating offsetting subsidies to emissions-intensive, trade-exposed firms whose survival might be threatened by their proposed carbon tax, but say the process would need to be transparent.

The Green Party announced on Sunday a "climate tax cut" that would replace what it regards as a failed emissions trading scheme with a carbon tax, the revenue from which would be recycled as cuts to income tax and company tax.

For several years the previous Labour Government also had a policy of a carbon tax - though it never quite made it onto the statute book - part of which was to have negotiated greenhouse agreements with large emitters that were either exporters or had to compete with imports, and for which a carbon tax on every tonne they emitted would be commercially lethal.

One such agreement was concluded with the Marsden Pt oil refinery, which was about to embark on some major capital expenditure. It involved agreeing a pathway to lower emissions which determined how much of the refinery's emissions would be subject to the tax.

Co-leader Russel Norman told the Herald the Greens would be open to negotiations with the likes of the owners of the Tiwai Pt aluminium smelter or the Glenbrook steel mill.

"But there would need to be justification for why there needs to be a subsidy and if there is going to be one it should be an up-front cash subsidy, so that taxpayers know what they are in for. At the moment taxpayers are subsidising industries [through the free allocation of units under the ETS] and they don't realise it," Norman says.

"If they have to argue for it in public rather than in private and everyone knows what they are getting, it will put significant downward pressure on the cost, which is important because it is taxpayers' money. If you want public money you are going to have to compete with all the other demands on the taxpayer."

But the potential cost of any such concessions to the smokestack sector does not form part of the fiscal calculation underpinning the tax cuts side of the Greens' policy. They expect initial annual revenue of $1.1 billion based on a carbon price of $25 a tonne (or $12.50 for emissions from dairy cattle).

That would fund a tax-free zone on the first $2000 of personal income (estimated cost $640 million) and a company tax cut of 1c in the dollar ($250 million). The balance would be needed for payments to post-1989 forest owners at $12.50 a tonne for the carbon their trees sequester but for which they will have to account upon harvest.

It is classic Green tax policy, Norman says: shift the tax burden away from things you want more of, like household incomes and business profits, and on to things you want less of, like pollution and resource depletion.

A tax-free zone on the first $2000 of income is the most progressive way of delivering an income tax cut, he argues.

"Everyone gets the same amount but it is worth more to you if you are poor than if you are rich."

The Greens argue that the ETS has failed to deliver a carbon price that would set the economy on a path to a low-carbon future and that embarking on that transition is not only the right thing to do but the smart thing from the standpoint of economic competitiveness in an inevitably carbon-constrained future world.

But if a carbon tax is a better approach, the question is how to get there from here.

"We recognise the unwinding of the ETS will be complex," Norman says.

"This system has been created. It's a bloody mess. We have to unwind it in a fair way and it is not going to be easy. But it is better to unwind it now and just get on with introducing a system with some integrity, even while you recognise there are some complexities about unwinding this ridiculous system."

A key complication is the large number of New Zealand units which have already been issued under the ETS but which have been stockpiled rather than surrendered for compliance purposes, because of the arbitrage opportunities arising from a collapse in international prices of Kyoto units and the Government's refusal to limit emitters' ability to use them.

Estimates of that overhang range from 90 million to 150 million NZUs - a range that testifies to the opacity of the system.

They represent property rights for emitters or forest owners, even if the opportunity cost of hoarding them was low, and a fiscal liability to the Crown.

The Greens would allow emitters to pay their carbon tax in kind (NZUs) rather than in cash but at a value of $5 an NZU (roughly their market value on Sunday) - so five NZUs per tonne of emissions rather than one-for-one.

However, they would make an exception for NZUs allocated to owners of pre-1990 plantation forests in partial compensation for their deforestation liability.

That liability arises when a forest is felled but not replanted because there is some more valuable land use. But the owners of pre-1990 forests, unlike their post-1989 brethren, are not entitled to any credits for the carbon their trees have sequestered while growing.

The Greens' policy would allow those units to be used on a one NZU per tonne basis.

"But it needs to be staggered.

"We can't swallow all that at once," Norman says.

A large proportion of the pre-1990 forests belong to iwi, often as part of a Treaty settlement. They have been unimpressed to witness the collapse in the value of the units, and the Iwi Leaders Group has decided to lodge a Treaty claim over the issue, spokesman Chris Karamea Insley says.

Norman says: "We think they have a legitimate claim over what has happened to the value of their units."

Meanwhile, the international backdrop to the domestic policy debate is changing. President Barack Obama has just announced he will use administrative powers of the Environmental Protection Agency to require emissions from electricity generation, about a third of the United States' emissions, to be cut by 30 per cent from 2005 levels by 2030.

And the World Bank, in its annual report on the state of world carbon markets released yesterday, says China's regional pilot emissions trading schemes mean China is now home to the second-largest carbon market in the world, by volume anyway, after Europe.

In terms of prices, the five Chinese schemes are delivering carbon prices between five and 11 times higher than New Zealand's, which ranks bottom of the 26 ETSs the report lists.

In the measured language of such organisations, the World Bank is scathing about New Zealand's scheme. It notes that last year in the international negotiations we adopted an unconditional target of a 5 per cent reduction from 1990 levels by 2020.

But it says - as the Government's own forecasts admit - that current measures and policies are not sufficient to meet this target domestically.

"The unlimited use of international credits in the New Zealand ETS, combined with the record low price for these international credits, has resulted in insufficient domestic reductions."

That is putting it mildly.

New Zealand would have to rely on international carbon markets to meet the 2020 target, the World Bank says.

But the Government has managed to get us excluded from the Kyoto carbon markets from next year by refusing to undertake a commitment under the climate treaty's current commitment period which runs until 2020.

Since its change of government the chances Australia will have an ETS New Zealand might link to any time soon are now indistinguishable from zero.

So what is the plan for honouring this international undertaking?

The plain fact is the Government doesn't have one.