Emissions Tax: The Least Worst Option

A carbon tax could reduce income tax or petrol prices

 

The New Zealand government’s emissions trading system, due to come into force in 2010 for energy and 2013 for agriculture, is the wrong approach, says a new report being released on Thursday.

 

In a paper being released by the Centre for Independent Studies, Emissions Tax: The Least Worst Option, researchers John Humphreys and Luke Malpass argue that an emissions tax linked with other tax cuts would be a big improvement over the proposed emissions trading system.

 

‘Despite including the word trading in the name, an emissions trading system is not the best market solution for creating an emissions price,’ say Humphreys and Malpass. ‘Like import quotas, emissions trading is a costly, bureaucratic and inflexible approach. In contrast, an emissions tax is a relatively efficient and flexible alternative that allows market participants the maximum freedom to do business.’

 

An emissions tax would also lead to less lobbying and rent-seeking, lower administrative and compliance costs, provide price stability, and avoids wasteful handouts to business. The biggest benefit is that an emissions tax can be more easily linked with other tax cuts.

 

If designed well, a revenue-neutral emissions tax could have no net cost to the economy.

 

‘The rationale for pricing emissions is not to reduce the use of energy, transport or agriculture. The goal is to speed up the shift to new ‘cleaner’ technologies. By excluding agriculture, an emissions price would still provide important incentives towards new technology while not unduly harming the NZ economy,’ say Humphreys and Malpass.

 

It is vital that an emissions tax is linked with tax cuts:

 

Income Tax Reform:
 A $40 per tonne CO2-e non-agriculture emissions tax would raise over $1.4 billion, which could be used to increase the cut-off point for the 21% and 33% tax bracket, moving more average workers into lower tax brackets and stimulate employment and economic growth.

Environment Tax Reform:
An already existing environment tax applies to fuel and diesel. Replacing this with an emissions tax would offset the higher costs of electricity with lower transport costs.

 

Company Tax:
A $30 per tonne CO2-e non-agriculture emissions tax would raise about $1.1 billion, enough for the government to reduce the company tax rate from 30% down to 25%. This would result in stronger business growth, higher wages, and lower prices.

 

Luke Malpass is a Policy Analyst and John Humphreys is a Research Fellow at the Centre for Independent Studies.

The embargoed report is available at www.cis.org.nz/issue_analysis/IA113/IA113.pdf.

 

For media interviews phone Luke Malpass on 04 499 5861 or +61 424 643 379.


The Centre for Independent Studies: PO Box 5529 Lambton Quay Wellington. www.cis.org.nz

 

 

Emissions Tax: The Least Worst Option

Following warnings from mainstream scientists, politicians around the world have rushed to implement a range of taxes, regulations, subsidies and schemes to save humanity from the impending dangers of warmer winters and higher waters.

But while the climate change science debate has focused minds for the past few decades, the climate change policy debate has sadly not enjoyed the same attention. Not all policy responses are equal. Before taking action, it is incumbent on our political leaders to carefully consider the benefits and costs of different policy options.

Many countries, including New Zealand, have started to move towards an emission trading system (ETS), combined with ongoing spending on targeted research. This is the wrong approach. A more flexible, efficient, effective, and transparent approach would be to replace all current efforts with a moderate and revenue-neutral emissions tax.

An ETS raises a number of concerns, such as lack of flexibility for business, the corporate welfare implicit in giving away permits, the difficulty in removing or reforming the scheme when change is needed, significant compliance and administration costs, lack of transparency, continued rent-seeking and lobbying behaviour, and market manipulation. These costs would likely outweigh any potential environmental benefits.

A less damaging alternative is an emissions tax. Not only would an emissions tax avoid many of the problems associated with an ETS but importantly it would raise an ongoing consistent amount of revenue and could therefore be linked with offsetting tax cuts. Linking climate change policy to tax cuts is vital to ensure that the policy does not cause significant economic damage.

A $30 per tonne CO2-e emission tax could be linked with a reduction in the company tax rate from 30% down to a more internationally competitive 25%. Or a $20 emission tax could entirely replace the current fuel tax, effectively making the current environment tax (fuel tax) more efficient by applying a lower rate to a broader base. Alternatively, a $40 emission tax would allow the government to drop the top marginal income tax rate down to 30%. This paper considers these options and more.

Politicians around the world are feeling the pressure to introduce climate change policy. But poor policy will leave us in a worse position than no policy. An ETS is poor policy and before following the world down that path the NZ government should pause to consider other options such as a revenue neutral emissions tax.

John Humphreys is a Research Fellow with the Economics Program at The Centre for Independent Studies. Luke Malpass is a Policy Analyst with the New Zealand Policy Unit of CIS.