Policy clash leaves carbon tax in limbo

By BRIAN FALLOW

There may be a carbon tax in our future, but at the moment the question is uneasily in the no man's land between tax policy and climate change policy.

The Government is committed to ratifying the Kyoto climate change treaty next year, and a tax on the carbon content of fossil fuels is one of the policy instruments being considered.

But at the same time it has commissioned a major, independent, review of the tax system by a committee headed by Rob McLeod.

And it has has promised to introduce no significant new taxes without a mandate from the next general election.

The McLeod committee's final report is due on October 24. Its interim report in June (remembered chiefly for an unpopular suggestion of a tax on the equity in houses) left the door open for a carbon tax.

One of the principles McLeod espouses is that tax should distort relative prices as little as possible. This would count against a carbon tax compared with, say, an increase in the broader-based GST.

But the review acknowledges that an exception to that general principle can be made where environmental harm is being done that is not reflected in prices.

That is the rationale of the Kyoto Protocol.

It provides a mechanism by which, over time, the worldwide environmental costs of fossil fuel use can be internalised and is reflected in the prices users pay.

Otherwise, alternative sustainable technologies are unlikely to become commercially viable.

The weight of submissions to the McLeod review from business on the carbon tax was negative.

The Business Roundtable contends that the science is uncertain, New Zealand is a tiny part of the problem anyway and that McLeod was right to point out in June that the potentially profound impacts on particular sectors of the economy have yet to be adequately analysed.

"It is far from clear that the costs of using a carbon tax, or an emissions trading regime, to abate the emission of greenhouse gases are less than the costs New Zealand would incur from adjusting to the forecast changes," the Roundtable said.

Running like a drumbeat from the business submissions is the threat a carbon tax could pose to our international competitiveness, as about half the world (in terms of greenhouse emissions) is outside the Kyoto Protocol.

New Zealand Refining, for example, says its Marsden Point refinery products compete with refined products from Singapore, which is outside the protocol.

As well, other policies, such as reducing pollutants such as sulphur and benzene from its products, have a cost in extra CO2 emissions.

The Coal Association says a carbon tax would spark industrial closures and reduce the tax base, which would be counterproductive in terms of McLeod's brief.

It would also be counterproductive in reducing global greenhouse gas emissions, if it resulted in New Zealand having to import energy-intensive products from non-Kyoto countries.

The association said a carbon tax would be a barrier to investment in energy intensive industries, echoing an argument from the forest industry.

Cheap energy, argues Golden Bay Cement, is one of New Zealand's few areas of comparative advantage in manufacturing.

Waikato University points to another side of the international competitiveness argument, "namely the possibility that trading partners, particularly in Europe, might erect new barriers against our exports if they consider we are providing an 'environmental subsidy'.

"Having imposed environmental charges internally, they could argue in the WTO that they need to equalise costs at the border."

Comalco says a unilateral tax has not been a successful mechanism elsewhere. "Most countries that have developed carbon and energy tax schemes have excluded most carbon-and energy-intensive sectors, recognising the unacceptably high costs such measures have on those sectors."

An environmental lobby group, the Ecologic Foundation, worries that the base for a carbon tax is rapidly shrinking because of political inclinations to grant exemptions.

"We would welcome further analysis of the costs of granting such exemptions since it appears that ... exempting methane emissions from the farming sector, existing [industrial] emitters of carbon dioxide, and possibly the forestry sector's new investments in processing its wall of wood, would be to progressively shift the burden of adjustment on to a small sector of the economy consisting mainly of new small businesses, domestic consumers and transport users."

One of the McLeod committee's preliminary views - that it cannot see why existing emissions from large emitters should be exempted from a carbon tax under a grandfathering provision - has drawn fire.

"Those who have already reduced their reliance on fossil fuels will automatically be rewarded by the lower carbon charges they face," the committee said.

Comalco said that was inconsistent with the basis on which it and other companies had entered into voluntary COsup2 reductions agreements with the Government in 1995.

It was, therefore, unacceptable. Comalco has cut its emissions of greenhouse gases by about a third from 1990 levels, despite a major increase in production from the Tiwai Point smelter.

The Government is seeking to conclude new negotiated greenhouse agreements with the major industrial emitters as a quid pro quo for exemption from a carbon tax.

Golden Bay Cement said the cost increase from a carbon tax for energy-intensive industries remained high even if major additional efficiencies were found.

"In any case energy-intensive industries have already implemented most of their viable energy-efficiency projects as part of efforts to continually reduce their cost of production."

The Environmental Defence Society prefers a system of trading in emission rights over carbon tax.

But it says the initial stock of emission rights should be auctioned. The grandfathering alternative rewards past polluters, it says.

"To the extent auctioning of the rights is a tax we support it," the society says.

If a carbon task were adopted, resulting questions would be: where in the supply chain should the tax be imposed, at what rate should it be set, and when and for how long should it be imposed?

NZ Refining says taxing oil, gas and coal at the point of importation or production raises a problem.

It would bear the cost of the tax on the crude consumed in the refining process, which imports refined in a non-Kyoto country such as Singapore would escape.

It would prefer the point of obligation to be the end user.

BP would prefer no carbon tax but says imposing it at the refinery gate or import port "is more efficient than a charge on imported crude oil because international aviation and marine fuels are to be tax exempt".

A carbon tax should start off at a very low level, BP says, and target a level in 2008 (the start of the protocol's first commitment period) which does not exceed the expected global trading price of carbon in 2008.