Mike Shaw and Peter Felstead: Flow-on costs of carbon tax will be widespread

New Zealand is proud of its "green" reputation and considers itself a champion of the environment on the world stage.

Although not the first country to sign up to the Kyoto Protocol, it was certainly leading the charge, and it appears this is also the case in relation to the introduction of a carbon tax.

It now looks likely that from April 1, 2007, our electricity and fuel bills will increase.

The Government says the rise will be only $4 a week for the average household, but what it has not mentioned is the likely rise in the cost of other day-to-day goods (those that are produced in New Zealand, anyway) and services.

In its simplest form, the producers and importers of products that are known to cause greenhouse gas emissions will be required to pay the carbon tax of $15 a tonne based on the emission factor of the product supplied, for example, coal and petroleum products.

The tax will be collected in much the same way as GST but, unlike GST, the tax included in the purchase price of affected goods and services will be able to be recovered by the purchaser only in very limited circumstances.

Clearly the tax will bring inflationary pressure and will impact on the international competitiveness of New Zealand businesses.

A negotiated greenhouse agreement (NGA) is intended to provide relief to exporters and importers who operate in the global market, as these businesses may be competing against products that are not subject to such a tax.

But the proposals are fraught with problems. Businesses which obtain an NGA should obtain a rebate on the carbon tax included in the purchase price of the affected goods - petroleum, coal, electricity. This rebate will address direct costs only and will not extend to general price increases to indirect costs, because of the impact of the carbon tax.

The process of applying for an NGA is extremely complex, subjective and prohibitively expensive. New Zealand business must undertake a study of the world's best practice for its industry.

A concession will be granted only if the New Zealand business can demonstrate it is emitting greenhouse gases in line with the world's best practice.

The cost to obtain an NGA is estimated between $100,000 and $500,000. This process can be accessed only by large companies. Understandably, very few businesses have so far gone down this path.

Although the introduction of the carbon tax is only at a discussion document stage, business can seek to negotiate an NGA now.

There is no legislative basis for this. Rather, the process is documented through Cabinet decisions and administrative procedures established by officials.

Contrast this to other tax rebates where there is clear legislative authority to guide taxpayers.

Meanwhile, to obtain the right to negotiate an NGA with officials, ministerial approval must be sought on a taxpayer-specific basis.

Again, contrast this with other tax regimes where there is no ministerial involvement to obtain such tax refunds.

Following on from the above, these proposals are void of a detailed analysis of how taxpayers can dispute issues.

For example, it is not clear how businesses appeal should they not be issued an NGA, or if they believe the emission factor is excessive, or if there is disagreement on the world's best practice study, or if the taxpayer is achieving the world's best practice on greenhouse gas emissions.

While businesses competing on the international stage may obtain rebates if they successfully negotiate an NGA, their domestic counterparts will suffer.

They will face higher production costs for fuel and electricity with the carbon tax being passed down the supply chain. The likelihood of them being able to pass on these increases to consumers is minimal.

Alternatively, we may see a return to tariffs applying to a greater number of imported goods. Local production will suffer and that can only lead to job cuts.

* Mike Shaw and Peter Felstead are tax partners at accountancy firm Deloitte.