Editorial: Carbon tax plan no substitute for trading

Dr Russell Norman, co-leader of the Green Party. Photo / Marty Melville

Opinion

The words "tax cut" and "Green Party" do not normally appear in the same sentence, unless the party is condemning the cut. But the Greens have adopted a climate change policy for the coming election that enables them to offer a tax reduction for all incomes, and companies. The party proposes to replace the emissions trading scheme with a simple carbon tax and use the revenue to reduce personal and corporate rates so that the average household is better off.

The policy was immediately welcomed by the conservative Taxpayers' Union, not just for its tax cuts but on a point of economic principle. Echoing the former Business Roundtable, when the emissions trading scheme was introduced, the Taxpayers' Union said: "The ETS is not a good market solution for creating a carbon price. It is more similar to a quota, or licence system that is bureaucratic, inflexible and vulnerable to political manipulation."

Emissions trading is more accurately called a cap-and-trade system. The Government puts a cap on the level of greenhouse gas emissions permitted from an industry and issues tradeable emissions rights to firms in the industry. Those that can reduce their emissions may be rewarded by selling their unused rights, those that do not make the effort must buy the rights if they want to increase production. The price would be set by the demand for additional emissions.

The scheme was introduced just as New Zealand went into recession in 2008 and there has not been much additional demand for energy and transport since. In a study for the Green Party, economic consultants Berl found total CO2 emissions were flat up to 2012. Energy sector emissions had dropped 7.6 per cent but that was offset by methane emissions from dairy farms.

The Greens believe a tax would be a more effective emissions deterrent. They want to set the tax at $25 a tonne for all sectors except agriculture, where dairy products alone would be taxed, at $12.50 a tonne. To compensate households for the added cost to electricity and petrol, the Greens would use the revenue to make the first $2000 of income tax-free. They would offset the added cost to industry with a 1 per cent reduction in the company tax rate.

Dairy farmers would suffer most. Berl estimates the greenhouse levy would add 2 per cent to the expenses of the average dairy farm. It may be no consolation to the producers that Berl calculates they would all remain above break-even point at prices currently projected.

A tax has the merit of being more stable and predictable than a price set by trading. But taxes can change, too. The Greens' tax is part of a strategy to reduce the country's emissions to a sustainable level by 2050. If the proposed taxes did not discourage emissions sufficiently, higher rates would soon be deemed necessary.

It is always dangerous to use taxes for a punitive purpose. Too many households might decide to pay the added cost of fuel, or butter as the case may be, rather than reduce their consumption. In that event, the policy has succeeded only in adding costs to the economy without contributing to a reduction in global warming.

Those who prefer a tax to a cap-and-trading system seem to imagine a tax would relieve them from a cap on emissions. They would quickly discover otherwise if a tax did not have the Greens' desired result. Emissions would be capped and taxed.

The country is better off with a trading system that can set a price reflecting the most valuable use of available emissions permits. Governments can put a sinking lid on total emissions. They do not need additional taxes or powers. Give the trading more time to work.