Sunday, June 1, 2014

Initial thoughts on a carbon tax (cut)

The NZ Greens' carbon tax policy has plenty of merit, and with appropriate design could sweep away many of the Emissions Trading Scheme's (ETS's) worst features. Current government policy allows unrestricted imports of hot air credits which opens the door to speculators. In addition, "money for nothing" schemes undermine our NZU currency, such as gifts of NZ Units (NZUs) to polluting industries who can then surrender cheap hot air credits from former soviet countries with failed industrial economies and profit from the sale of NZUs. For the record, here's what those gifts to NZ Aluminium Smelters Ltd. represented between 2010 and 2012:

Year of allocation Number of credits
2010 210,421
2011 437,681
2012 301,244
3 year TOTAL 949,346

On today's prices this allocation is worth about $4.5 million if the company purchases ERUs for surrender to account for its pollution and immediately sells the grandfathered NZUs on the open market.  The number for all "trade exposed" polluting industries for those three years is a free gift, for doing nothing positive for the environment, of approximately $42 million.  Ironically, if NZ's agricultural sector had been included in the ETS with 90% grandfathering of NZUs as envisaged, then the National government's policies would have led to each farmer having a small fortune in this type of ERU rort. Add in all the ad hoc, but "fiscally neutral" gifts to forest companies, electricity generators and others that the government wished to either placate or encourage, and you see a scheme that is failing, with an ERU price of just a few cents and an NZU price of $3 to $5 that is insufficient to motivate changes in behaviour that would benefit the environment.

The National Party's flawed policies on climate change have allowed speculators to accumulate a mountain of NZUs in our carbon credit registry, and so there would have to be a transition to clear this backlog in order to avoid court cases. Only 1.5% of surrendered credits in 2013 were NZUs, while 82% were "hot air" ERUs. Most grandfathered NZUs must, therefore, be in our credit registry.  This transition period will probably reward speculators again, but it's better than persisting with a status quo that does nothing of value for the environment while enriching polluters and speculators.

I've long been an advocate for reform of the ETS, but a well-designed carbon tax could be at least as good, if not better. Taxation is probably more efficient than an ETS, with a well developed infrastructure in place to collect it.  The idea of a carbon tax cut is also great, with the potential to make the policy fiscally neutral for poor people, and you have to admire this clever intervention.  I also like the fact that all sectors are included, although the exemption of hill country farmers and different rates for some sectors is a potential problem (see the 2nd to last paragraph).  Treating sectors differently in the ETS has distorted the carbon market.  New Zealand is internationally renowned for dragging its feet on climate change mitigation, and a carbon tax could begin to restore our reputation.

The proposed tax rebate of $12.50/tonne of CO2-e may be barely enough to promote new tree planting.  Studies at the School of Forestry, University of Canterbury, suggest that $15/tonne is required in order to placate concerns about risks of carbon credit liabilities over long forest rotations.  A more stable price per tonne through taxation may reduce perceived risk, however, and so $12.50 may be just enough.

In order to run a fair tax/rebate system, we need to maintain a registry of carbon stocks stored in the landscape.  Forest storage could easily make NZ completely greenhouse gas neutral (see my earlier posts), and so it's important that fluctuations in storage are properly accounted for.  By extending this accounting to the entire landscape tax rebates could provide added incentive for new house construction and contribute to solving our housing crisis.

I am a little concerned that, just as we have an infrastructure to collect tax, some rich people also have very well designed schemes to avoid paying tax, and it may be a challenge to design a scheme that doesn't open up a few more tax loopholes.  In particular, it is unwise to have different tax rates for different sectors.  For instance, how many sheep are required in order for someone to qualify as a carbon-tax-exempt "hill country farmer"?

On balance, well done Greens, for injecting this idea into our political maelstrom.  Let's hope it bears fruit.