Emissions Tax: The Least Worst Option

Luke Malpass
16 July 2009 | IA113
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.

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