Emissions Trading Scheme or Carbon Tax? The Australian experience and the lessons for New Zealand

By Suzi Kerr, and Frank Jotzo*

Australia had an emissions trading scheme with a fixed price.

It was one good way to encourage carbon cuts throughout the economy.

But the opponents called it a carbon tax and won the political debate.

The scheme has now been abolished, and an economically and environmentally inferior subsidy scheme has taken its place.

There is a cautionary tale in this for New Zealand.

The country needs to make some big decisions about climate change policy. The emissions trading scheme looked mortally wounded and now is limping along again.

But policy settings for the future are still unclear.

Investors, including foresters, do not know what emissions price they should factor into their decisions. 

Is it worth planting a forest for carbon now? We cannot tell you, because it depends on New Zealand’s future carbon price, which could be tiny or quite high depending on the decisions governments will make about the settings of the scheme over the next decade and beyond.

The New Zealand Green Party has called for government to fix the price in the emissions trading scheme, to end the uncertainty. A fixed price works like a carbon tax, but also allows carbon farmers to sell their carbon credits at that price.

Theoretically, going the tax route takes the investment uncertainty out of the picture. And so we should see low-cost emissions savings options in industry go ahead, and low-cost carbon plantings going in, and both should make a profit down the track.

But as the Australian experience shows, there can be a more fundamental uncertainty that comes from politics.

Choosing a policy instrument that fixes the carbon price does not mean businesses know what the carbon price will in fact be five or ten years from now – or indeed whether there will be a carbon price at all.

That’s because a future government could “axe the tax”, as one of Australian Prime Minister Abbott’s more memorable three-words slogans went.

The previous Australian government under Julia Gillard had counted on cleverly designed redistribution under the carbon pricing scheme to make it politically bombproof. Over half of the permits were sold to emitters. The revenue was used to cut income taxes to lower- to middle-income households, and to raise family and welfare payments. A large majority of households was better off as a result than without the carbon price.

But the relentless rhetoric against the “carbon tax” was stronger than the facts. Opinion polls showed that a majority of people thought that they were worse off, and public support for putting a price on carbon is low now.

Who is to say that this could not happen in New Zealand?

We will get predictable climate policy that has strong effects over the long term only if there is a broad-based political consensus about it. It is like with free trade: only once both major parties were on board with moving towards an open trading regime could lasting reform take place – both in New Zealand and Australia.

As long as the issue is a political football for the major parties, it will be a rollercoaster ride. And every time the ride goes downhill, investors lose confidence.

Thankfully there is every reason for those with all flavours of politics to be in favour of sensible climate policy. The threat from climate change in our region is huge. All developed countries no matter their size need to show that they are doing their bit to support global cooperation. And importantly for governments with a shorter-term focus, getting away from fossil fuels has strong benefits, from health to energy security; and planting trees on marginal grazing land can help stop land degradation and improve water quality.

And so the broader conversation that we need to have in our societies is not about the details of the policy settings, but about what we can do to cut emissions, and what we want to achieve by doing it.

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By Suzi Kerr, Senior Fellow, Motu Economic and Public Policy Research, and Frank Jotzo, Director of the Centre for Climate Economics and Policy at the Australian National University.

This piece follows from a discussion on this topic by Kerr and Jotzo at the annual conference of the Australian Agricultural and Resource Economics Society in Rotorua in mid-February 2015. It was first published on a MOTU/NZCCRI blog and is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

"planting trees on marginal grazing land can help stop land degradation and improve water quality."
 I'm not so sure about this statement. I farm near a pine forest. grass doesn't grow under trees. These is a fine layer of silt mixed with pine needles. Like wise in a forest park when you walk off trail it is naturally qiute muddy as the bush crowds out grass growth. At least from a silting perspective healthy grazing pastuures ( as long as there is not excessive bogging by stock in winter) can better hold that silt layer. I'm not a scientist but these are just my observations.

Hence the use of the word "can", not will.  Trees do help improve water quality, increase infiltration etc, except once they are harvested it's the exact opposite for the next three years.
 
I have been on a farm where the stream catchment was in forestry, during a heavy rain you get brakish water from the forest, which is from the tanins in pine needles.  Yet once the stream had exited the property after 3km of pasture the water is brown with mud, some could be comming from the lane-ways and the rest from the pasture.  Yes it gets worse in wet weather, especially in winter.  Those are my observations, I have also seen the erosion that occurs after forestry harvest and in the long run it is hard to say which is worse.

The valleys in the mountains were formed by erosion long before anyone thought of clearing the trees for farming.

I have seen the opposite.
Tests in this area prove the nutrients levels and eColi levels are significant higher coming from bush areas, with bush humus and animal life.

On farm land, unless animals had been crossing the water used to be clear. (not so much now with all the weeds and algae).
It always gets dirty and sticks etc when there's a storm and the water level increases substantiatlly as it picks the silt and bebris dropped from drier times - that is true of bush and farm,  worse though in bush areas as there is more humus and silt around the banks.

http://www.teara.govt.nz/en/geology-overview/page-9
I googled geology of rivers here''s an excerpt from the article above:
The most extensive lowlands, such as Hawke’s Bay and the Canterbury Plains, have been created by rivers depositing vast quantities of sediments eroded from upland areas. As rivers have emerged from the confines of valleys, they have dumped their sediment load, forming great spreading fans of sand and gravel.
This can't be right no mention of farmers!!, I feel a bit miffed I thought I was god!

If we can't argue  with the article above ( put out by NZ govt), then why are farmers being fined large amounts for depositing 20kg of silt into the river. How can this be called an environmental disaster when the silting of rivers is a natural geological event. How can the cleaning of a water race depositing silt in a river kill fish, when a raging flood moving thousand of cubic feet of silt does'nt? We argue about whether there should be pines or sheep on the hills and the effect this has on rivers, I wonder if makes any difference. We are putting our trust in local governmet ( who have too much power) to monitor our environment. My argument is that these people are self serving, the answers they find suit their agendas if you defy them they threaten you with $600,000 fines or jail sentences. And yet these are the same people who want to investigate large scale water storage and the expansion of intensive farming.

The old ideas of river management were along the lines of the geological article above . The old catchment boards used to remove gravel from the rivers where it was building because they realised that because with silting and gravel build up  a river over time will want to change course. This wasn't a problem before land ownership was established
. In our town , the old river course was about 1km from where it now resides. This is a natural thing, but with land ownership people require that rivers stay on their present course. The problem today is regional councils have convinced everyone that river silting is largely a farming problem ( not true) and their approach to river management is more environmental monitoring where they can take more money in wages and consultancy fees instead of giving it to contractors to remove gravel build ups from rivers.

"and what we want to achieve by doing it."
Easy not collapse our society, food chain and then go extinct.
 

Actual emmissions are on the rise, accounting tricks can't change that.  Unless the carbon tax is huge it wont change that, and if you use a carbon tax to give a tax rebate you are just being silly.  You could get better results from an advertising campaign about reducing emmissions, and the threat of climate change.  Start by getting popular support, everyone knows advertising works, thats why it is such a big business.  Forget about the tax, that just clouds the issue into an idealogical debate, doesn't work.

"Australia had an emissions trading scheme with a fixed price.
It was one good way to encourage carbon cuts throughout the economy.
But the opponents called it a carbon tax and won the political debate.
The scheme has now been abolished, and an economically and environmentally inferior subsidy scheme has taken its place."

Aus had a ETS, but opponents won the polictal debate, the scheme has been abolished.

So a "good way" is actually one that never actually worked but we really want to believe it could have.

file: shit-i-cant-believe-i-read

Yes, what do you want to acheive by campaigning to cut emmisions? These things tend to take care of themselves. Nobody actually likes pollution.
 
"Between 1990 and 2008, US manufacturing output grew by one-third. Yet air pollution from US factories fell by about two-thirds."
 
http://www.vox.com/2015/2/8/7999417/US-factory-pollution-offshoring
http://www.nber.org/papers/w20399.pdf

It just so happens that I was running a factory in the US for some of that time - in the early part. And I can tell you that aggressive and savvy regulation by the US EPA had most factory owners/managers including me changing behaviour. We had to innovate to stay doing what we were producing. In the three years I managed that company we changed a lot technically, almost all for the better. What we learned we transferred to factories in the UK and NZ, although to be fair there were lots of tech transfers around our group so it wasn't one-way. But on the clean air front it was mostly from the US to others. The impact was significant.

Mercury pollution - The US EPA has taken a long time (since you were there) to address this problem apparently, although it does become law to use bromine and bromides to reduce these emissions as from April 2015.
 
Coal-burning power plants are the largest human-caused source of mercury emissions into the air in the United States, accounting for over 50 percent of all domestic human-caused mercury emissions - source - http://www.epa.gov/hg/about.htm
 
Unfortunately they don't fix themselves - and the polluters didn't volunteer either

" Mercury emissions decreased 51 percent since 2000."

http://www.nrdc.org/media/2014/140528b.asp