Carbon case grey rather than Green

By BRIAN FALLOW economics editor

The McLeod tax review has left the door open to a carbon tax, or at least ajar.

It is unenthusiastic, but cannot come up with a theoretical reason to reject it.

The view that activities which harm the environment are always and everywhere to be curtailed, and that tax is the way to do it, to the review committee smacks of paternalism, forcing the decisions of the many to conform to the opinions of a few.

Greens co-leader Jeanette Fitzsimons expressed disappointment with the "old-fashioned and narrow thinking" behind the review.

The committee was unpersuaded by the argument, associated with the Greens, that a move to eco-taxes would generate a double dividend - not only environmental gains but relief from the deadweight costs imposed by the conventional taxes which eco-taxes would replace.

This is only possible, the review says, because the new tax expropriates a right the users of the eco-taxed goods currently possess, such as an unfettered right to emit carbon dioxide.

It dislikes selective taxes. Just as there is a burden of proof placed on those seeking tax concessions, there should be a similar burden imposed on any proposal to impose a new tax which would distort relative prices.

However, it will countenance as an exception to that general principle the case where prices do not reflect the environmental harm arising from the use of the goods it is proposed to tax. Greenhouse gas emissions, on the face of it, qualify.

While noting the uncertainties surrounding global warming projections, the review cites the United Nations Inter-governmental Panel on Climate Change's prediction of a rise in the range 1.4 to 5.8 deg C by the end of this century (compared with 0.6 of a degree recorded since 1860).

The committee concluded that a carbon charge would meet three necessary conditions for an appropriate eco-tax:

* The environmental damage associated with each unit of emissions is uniform (any CO2 molecule does the same damage as any other).

* The volume of emissions is measurable (at least, fuels provide a measurable proxy).

* The marginal damage imposed by emissions is measurable.

The last condition is required in order to estimate an appropriate rate of a carbon tax. It would be met if there was an international market in carbon quota (rights to emit greenhouse gases), as envisaged by the Kyoto Protocol. Quota would be traded at the marginal cost of reducing greenhouse gas emissions.

The review committee says New Zealand should not adopt a carbon tax until an international carbon market has developed to the point where it can give a clear indication of the likely price of carbon.

But the United States has said it will not ratify the Kyoto Protocol. That significantly reduces the depth and liquidity of any international carbon market.

Taking a stab at a potential international price - $50 a tonne of carbon - a carbon tax struck at that price would raise about $480 million a year, assuming no change in behaviour. The present excise on petrol raises $630 million.

If the tax were extended to the methane belched by sheep and cattle that would raise a further $440 million.

The committee is impressed by the fact that the Kyoto Protocol envisages credits for the carbon taken up by growing forests, provided they were planted on previously unforested land after 1990. That would put New Zealand as a whole well into the black as far as its national obligations under the Kyoto agreement were concerned. But the Government has said forest credits would not be used to shield New Zealand emitters of greenhouse gases.

If forest credits were distributed as a property right, forest owners would be free to sell them; local emitters would be exposed to the international price of carbon in making decisions about whether or how to reduce their emissions.