Paul Young says higher carbon prices can make our tax system fairer and more progressive, while tackling the urgent crisis of climate change

Paul Young says higher carbon prices can make our tax system fairer and more progressive, while tackling the urgent crisis of climate change

This is the seventh of ten articles in the Public Service Association's "Ten perspectives on tax" series.*


By Paul Young*

For as long as the world has been earnestly attempting to tackle climate change, economists have advocated a price on greenhouse gas emissions as the best way to do it.

The rationale is simple: emissions impose a cost on society, and exposing polluters to this cost will incentivise change. ‘Internalising’ the cost through carbon taxes1 or emissions trading will reduce demand for carbon-intensive products, make cleaner alternatives more competitive, and spur low-carbon innovation.

Beginning with Finland’s carbon tax in 1990, pricing schemes have expanded to cover 13 percent of global emissions.2

In New Zealand, following a tortuous and ultimately unsuccessful effort to put in a carbon tax, the Fifth Labour Government passed the Emissions Trading Scheme (ETS) late in its reign in 2008.

The failure so far to deliver a strong and reliable price, and to reduce New Zealand’s emissions,3 has eroded support and led to calls to start over with a carbon tax.

In this chapter, I discuss where to from here and argue three main points. First, that a reformed ETS can deliver results with the right political intent. Second, that New Zealand’s overall level of carbon pricing is low. And third, that higher carbon prices – if done right – can not only reduce our emissions, but help us build a fairer and more prosperous country.

A big fat price on carbon

“The appropriate price is what I call very scientifically ‘A Big Fat Price’ on carbon. You have to give very strong signals about the fact that you want to push out carbon.” - OECD Secretary-General, Ángel Gurría4

What price do we need? One approach is to determine a ‘social cost of carbon’, which the OECD argues can be “very conservatively” set at EUR 30 (NZ$45) per tonne of emissions.5 These assessments are contentious and values-laden; some studies find costs exceeding US$200.6 A second approach estimates the price needed to reduce emissions in line with agreed global temperature goals. A recent International Energy Agency study found CO2 prices should rise to US$120 (NZ$170) by 2030 in OECD countries for a reasonable chance of keeping global warming under two degrees.7

The price level is key, but so too are price reliability and predictability. Furthermore, even a strong carbon price will not be sufficient alone; it must be part of a broader policy package.

Reforming the ETS

The ETS has delivered neither strong, reliable nor predictable prices to date. This sorry tale has been told elsewhere.8 But the root of the problems has been political decisions, not the tool itself.

Most critical was the lack of limits on the quantity of foreign carbon credits participants could use. Since New Zealand was cut off from Kyoto Protocol carbon markets in mid-2015, the ETS has been recovering. With the phase-out of the “one-for-two” subsidy underway, polluters currently face a price around NZ$11.50 per tonne.9

Further change is needed. The ETS could be reconfigured as follows to deliver stronger prices and greater predictability, while retaining key advantages of trading:

1. Keep it closed from other markets for the foreseeable future;10

2. Introduce government auctioning of emissions units up to a fixed cap;

3. Introduce a price corridor with lower and upper limits (managed through auction reserves);

4. Set levels for the cap and price corridor several years in advance, with an indicative range extending further.

In this model, the government, not ETS participants, would lead any purchase of international carbon credits to help meet New Zealand’s commitments.

This model would establish a transparent, shrinking cap on New

Zealand’s emissions. It would give clear future price signals to guide low-carbon investments. Finally, it would generate revenue for the government, who could add it to the public purse, recycle it through rebates or reductions in other taxes, or invest it in targeted low-carbon infrastructure and programmes.

A broader view on carbon prices

Most developed countries have a range of specific taxes on energy use (for example, fuel taxes). Regardless of the reason for implementation, these impose an effective price on carbon.

In all but a few countries, energy taxes currently vastly outweigh explicit carbon prices.11 Overall, New Zealand has among the lowest effective carbon prices in the OECD. This strengthens the case for increasing our carbon price, and for considering a broader range of pricing instruments than just the ETS, such as the following.

Unlike a fuel tax, our unique road user charge system for diesel vehicles doesn’t penalise less efficient vehicles. The OECD has recommended introducing an excise duty on diesel.12

It is particularly urgent to avoid investments in long-lived, carbon-intensive assets, such as coal boilers. In the absence of a sufficient ETS price, one idea is a targeted levy on new boilers equivalent to, say, a carbon price of at least $100 per tonne.

While debate rages on about whether and how to include biological emissions in the ETS, we could start with a simple tax on nitrogen fertilisers with revenue used to fund native revegetation.

I would even make the case – at least in the short-term – for a fossil fuel levy on top of the ETS. This could be done relatively easily by charging a ‘surrender fee’ on each emissions unit.

Smoothing the transition

Concerns around rising carbon prices tend to gravitate around two poles: impacts on low-income households and impacts on trade-exposed businesses. Both are legitimate issues, and both can be managed through careful policy design. Current ETS settings are overly generous on the latter, while doing nothing about the former.

Emissions-intensive, trade-exposed activities get a free allocation of emissions units, reducing companies’ price exposure by up to 90%. There are problems with how this is done, but the biggest issue is opportunity cost: free allocation represents foregone revenue. While there is a case for transitional assistance, this must be weighed up against other uses of the money.

Elsewhere, carbon revenues are commonly recycled through rebates or tax reductions targeted at low-income households. Many governments also use a portion of the revenue to invest in a low carbon future. This too can be targeted towards those most vulnerable to the impacts of climate policies – for example, home insulation subsidies for low-income households, and retraining programmes for workers in carbon-intensive industries.

Depending on how the revenue is used, carbon pricing may even boost GDP growth.13 Research shows that environmental regulation has significant positive effects on long-run productivity.

With wise implementation, we have nothing to fear and much to gain from higher carbon prices. They can make our tax system fairer and more progressive, while tackling the urgent crisis of climate change.


[1] I use ‘carbon’ throughout to refer to all greenhouse gases.

[2] World Bank, Ecofys and Vivid Economics (2016). State and Trends of Carbon Pricing 2016. World Bank, Washington, DC. P.22. Accessible at https://goo.gl/6WeaXC

[3] Ministry for the Environment (2015). New Zealand Emissions Trading Scheme Review 2015/16: Discussion document and call for written submissions. Ministry for the Environment, Wellington.  Accessible at: https://goo.gl/OP6vkB

[4] Accessible at: https://goo.gl/L54SZY

[5] OECD (2016). Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems. OECD Publishing, Paris. Accessible at: https://goo.gl/Sy7NMZ

[6] https://goo.gl/mdKzkX. Accessed 19 April 2017.

[7] OECD/IEA (2017). Chapter 2 of Perspectives for the energy transition – investment needs for a low-carbon energy system.  Accessible at: https://goo.gl/qOicIx    

[8] Simmons, Geoff and Paul Young (2016). Climate Cheats. The Morgan Foundation, Wellington.  Accessible at: https://goo.gl/CmVYxz and Leining, Catherine and Suzi Kerr (2016). Lessons Learned from the New Zealand Emissions Trading Scheme; Motu Working Paper 16-06. Motu Economic and Public Policy Research, Wellington.  Accessible at: https://goo.gl/OMkWBL

[9] Unit price from www.commtrade.co.nz with 67% surrender obligations.

[10] I acknowledge the participants in Motu’s ETS Dialogue for helpful ideas and discussion on options for reform of the NZ ETS.

[11] OECD (2016). Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems. OECD Publishing, Paris. Accessible at:  https://goo.gl/TS8HMw

[12] OECD (2017). OECD Environmental Performance Reviews: New Zealand 2017. OECD Publishing, Paris. Accessible at:  https://goo.gl/wpHmK1

[13] OECD (2016). Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems. OECD Publishing, Paris. Accessible at:  https://goo.gl/NAsqGW


*Paul Young is a researcher and writer with the Morgan Foundation focused on climate change and environmental issues. He co-founded Generation Zero in 2011. This is the seventh article in the PSA's "Progressive thinking series, Ten perspectives on tax."

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

28 Comments

Comment Filter

Highlight new comments in the last hr(s).

Everything uses Carbon in some form. Therefore applying a full blown Carbon Tax would do nothing other than increase the price of everything.

As everything would increase by a relative increment. There will be little to no incentive to move to something cleaner, as the savings would be markedly reduced.

You mention Finland has had a tax since 1990. However after 27 years they show virtually no change in Carbon producing behavior as a result of the tax. Most of their carbon appears to be due to Electricity generation (which due to EU regulations happens to be mostly exempt from Carbon tax).

Co-incidentally, Electricity Generation appears to be where Finland is making the biggest inroads in Carbon savings.

End result, the Carbon tax is worthless.

"As everything would increase by a relative increment. There will be little to no incentive to move to something cleaner, as the savings would be markedly reduced."

...Have you ever actually read about carbon (and Pigovian) taxation?

Nymad, have you?

Increase the price of electricity generation and what happens - they pass it on to the factory using the power, who in turn pass it on to the end consumer.

Increase the price of Fuel and what happens - they pass it on to the transport company, who in turn pass it on to the end consumer

Increase the cost of a Factory production site and what happens - they pass it on to the end consumer.

I am yet to see a producer, go - hey wow, we have a new tax added, quick throw all our resources into a new production method that uses less carbon so we don't have to pay the tax.

They will pass the cost on and/or seek to avoid the cost via legal loopholes.

So yes, all costs increase by the same.

Yes, I have.

The point of it is not to levy it on one unit of carbon, it is to levy it on it's relative polluting potential.
So, there is a definite incentive to move to less polluting energy sources.
You saying "As everything would increase by a relative increment. There will be little to no incentive to move to something cleaner, as the savings would be markedly reduced." is just plain wrong..again.

Sure, the tax costs will be passed on (as they should be). But the point is that we are no longer using coal as a substitute for cleaner energy.

"Sure, the tax costs will be passed on (as they should be). But the point is that we are no longer using coal as a substitute for cleaner energy."

Incorrect - all we have done is move the source of the Carbon offshore. We now import wind turbines, solar panels, etc... that are made overseas in far less environmentally friendly ways, using far less environmentally friendly sources, and then transported all the way to NZ.

Yes we have reduced "our" use - but the world as a whole has increased as a result of this.

Correct.
The US in particular bought in strict environmental standards and then out sourced its pollution...
Solar & wind arent environmentally friendly - its a marketing scam for rich hipsters.
Is it actually better burning the coal over 15 years to boil the jug ... or burning it upfront to produce a solar panel? A solar panel which needs a backup fossil fuel driven infrastructure supporting it....

"Incorrect - all we have done is move the source of the Carbon offshore. We now import wind turbines, solar panels, etc... that are made overseas in far less environmentally friendly ways, using far less environmentally friendly sources, and then transported all the way to NZ."

Okay so you really don't understand the logic behind a comprehensive ETS, do you...

Plus, give me some figures that prove wind turbines are net polluting.
More tin foil hat sort of stuff, from yourself.

"give me some figures that prove wind turbines are net polluting"

The question is what value do the wind turbines actually add to the system. It is less polluting to NOT add them at all.

Well, obviously.
But that's not the point. It is whether 200MW of fossil fuel generation is more net polluting than 200MW of wind generation.

Yip - and that quickly becomes a piece of string calculation... where does the pollution accounting begin and end.
In the construction of the wind turbine, do you account for some pollution from the factory that supplies the backup part for the factory that supplies the furnace for the manufacturer who supplies ... etc etc
Do you account for some pollution for the backup generation required to manage the peaks (and complete non supply) that the wind generation necessitates?

The point is wind & solar is completely reliant on the underlying fossil fuel system. You cant isolate pollution for the wind generation - it tells only a skewed part of the story.

I understand the ETS incredibly well. It formed a core basis of my job for over 2 years.

An ETS only impacts the country it is ratified in. If you think the entire planet is going to ratify an ETS agreement then you are living in Utopia, not planet earth.

We can be as pro ETS as we want, but the first thing a China, Nigeria, Chad, or Bangladesh is going to say is "But you burned off more than 90% of your native bush for Farmland, used coal for decades to generate electricity, and manufactured with impunity to get your nation to where it is today - why shouldn't we be allowed to do the same?"

An ETS like any tax is merely a means of re-distributing resources. It is not going to reduce emissions.

Now to address this comment

"Plus, give me some figures that prove wind turbines are net polluting."

I don't have the figures any more than you do proving they are not net-polluting. So get your own ducks in a row first. But I can ask some simple logic questions that will definitely assist in proving my point.

1. Coal extraction in NZ is already bound by considerable environmental regulation.
Is the same true of coal from China? India? Indonesia? Ukraine?

2. Steel production in NZ is already bound by considerable environmental regulation.
Is the same true of steel made in China? Brazil? India? etc...

3. NZ Manufacturing is already bound by considerable environmental regulation.
Is the same true of manufacturing in China? Brazil? India? Thailand?

4. Ships registered in NZ are bound by considerable environmental regulation.
Is the same true of a ship registered in China? Indonesia? Taiwan? Venezuela?

5. Expand this out to all minerals and resources. Do you think wood from Indonesia, gold from China, Lithium from Brazil, or any other product is going to be better managed than the equivalent from NZ?

To reduce carbon requires individual consumer attitudes to change. This is happening, and is growing in momentum. It will not require a tax, if anything a tax will only hinder - after all who gets the cash from the tax?

Those who get the cash are those creating carbon credits (i.e. planting trees).

Already on the credit side, we are seeing a race to the bottom i.e. who can generate mature forest stands the quickest (and cheapest).

Why grow Rimu, Kauri, Matai, Kahikatea, Tawa, or Beech trees, when good ol' Pinus Radiata will hit maturity in 15 years. It may destroy the soil, spread like weeds, and provide almost zero benefit to local Fauna. But hey its cheap and gets us credits.

Heck why do it in NZ? when costs in China/India/Indonesia are cheaper. Rip out the coal from china - grow some terrible but fast maturing tree in the hole left over and bingo you are neutral.

Does that mean the problem has been solved?

Or does that mean we need better enforcement? Maybe the UN or the international court could step in and resolve it. I hear they do great work in Sudan, Rwanda, heck even the Spratleys is proving beyond them.

Finally a response to your tin foil hat theory.

By all means Nymad, feel free to debate, but at least bring something to the table other than consistently saying I am wrong.

You have no evidence you are right, and even less that your theories are sound. You don't even have any reasoning as to why I am wrong (or why you are right).

You simply make a statement to the effect that I wear a Tin foil hat. Which is odd in that I have no absurd conspiracies, I don't think Elvis is alive, nor do I think that dinosaurs built the pyramids. I simply use logical analysis of past events to predict what will happen in the future.

In all my work I am yet to underestimate the stupidity, greed, or short-sightedness of the human race.

What if there's another company making a similar product that's less energy intensive? Their input costs rise less giving them an advantage, which acts to encourage less energy intensive alternatives.

What if there's a local company competing with an overseas company to produce something, and transport costs increase? Depending on the inputs and where they are transported from, being closer to the final market becomes an advantage as fuel costs increase. This acts to encourage less energy intensive supply chains.

You may be right if the economy consisted of a single company in each market, which was able to just recoup its costs without having to adapt, but that isn't how the world works.

"What if there's a local company competing with an overseas company to produce something, and transport costs increase?"

We would have to directly tax all imports in exorbitant amounts to make this valid.
- Bought a Kiwi made car lately?
- What about a TV?
- NZ made clothes?
- How about NZ made Smart Phone?
- Have you built your house with all those NZ made building products? (Granted we probably should have to avoid the whole Shoddy Chinese stuff :-)

We are a global marketplace - we can tax our little behinds off - it wont change a thing, other than increase the cost to the NZ consumer.

I am sorry but the ETS is a BS artificial construct that will never deliver what is needed. It will unfailrly penalise the lower echelons (poorer) while allowing the wealthy to ignore or avoid their obligations. And as it is the wealthy who do most of the damage by having either businesses that create the emissions or produce products that create them. The ETS will be a scheme produced by bankers and politicians as a way to get wealthy off others excesses.

The only real solution is for the Governments to legislate and enforce limits on emissions, be they vehicular, or industrial. I note that our history is of Helen Clark's Government removing the law which stipulated that milled forests must be replanted, acre for acre. This alone led to huge tracts of once forest being converted to dairy in the central North Island. National are doing their bit too. I noted in today's local rag that they are looking at what they can do to make Kiwi Rail more profitable,. Simple really, make trucking companies pay for the damage they do to the roads, and stop spreading that cost across all motorists.

'The only real solution is for the Governments to legislate and enforce limits on emissions..."

But they cant. Our hands are tied.
Because limits = costs / slower economic growth = financial collapse. You cant unwind a debt Ponzi scheme.
Its full speed ahead to environmental degradation OR financial collapse.

Oh ye of little faith.... "But they cant. Our hands are tied.
Because limits = costs / slower economic growth = financial collapse."

What you mean is that there is no political will to enforce the change. Yes there will be a cost, but there is a cost to the status quo. and that cost is bio-system collapse. The ETS is a sop to the greenies while in reality NOTHING happens. Changing emissions limits on vehicles and enforcing them doesn't lead to economic collapse. making trucking companies pay for the damage they do to the roads will force their costs higher, making more shipper go to rail, meaning Kiwi Rail can use less hydrocarbons moving much more tonnage of freight. What effect hjas the Kaikoura earthquake had on emissions, when every one is shifting to coastal shipping to move goods? Stopping the power companies from paying dividends to the Government and instead investing that money in clean, renewable energy production that is affordable to everyone, especially beneficiaries and elderly retired will be a step in the right direction to. The ETS is sucking up to the rich while avoiding responsibility for the damage they do!

"The ETS is a sop to the greenies while in reality NOTHING happens". - I cant argue with that. And thats kinda of my point - its provides a reassuring feelgood that we are on to it ... when politically they know it means no changes required. It gives the appearance of acting.

But the hands are tied thing is to do with DEBT & all those existing promises in the system ... we must keep adding more debt to hold the old (debt) promises in the system together ... or the financial system collapses on itself. Effectively we need to keep increasing the energy burn behind the (new) debt.
You are suggesting adding more COST at the same time ... when the reality is we are struggling to (just) add more payable debt ...

Agree, The ETS is a tax collected by the savvy investor, paid by the consumer, legislated at the whim of politicians.
I'm one of those investors and see it as a joke.
There are better ways to improve behaviour if we want to reduce pollution.

Economic theory is not a reason to impose taxes...Economists should be made to put their theories to the test using their own finances.

All economists and those in the article references disclosed should make a declaration of their financial interests and or other benefits they receive or are likely to receive in the future.

Tax is good, because poor people want money too.

Would be better to put whatever money that we are prepared to into controlling population numbers. Reduce the number of people on this planet, then use resources far more wisely. That is the only effective method to address climate change if we are to make a difference. I see no-one anywhere near the levers of power prepared to deal with this.

Yes, the one child experiment has been going exceptionally well for China and has had no adverse consequences to speak of.

Imagine if they hadn't done it. However, the best way to achieve lower birth rates is women being educated and in control of their fertility. Given the means and the choice, women generally breed less, later and sometimes not at all.

If you wish to seek the betterment of humanity through the destruction of part of it I would prefer you restricted that destruction to your own family and refrain from telling the rest of us how large our families may or may not be.

What destruction? Nowhere did I mention going around killing each other, which, if we do not deal with our own overpopulation of the planet, we will do, as we always have when the going gets tough.
AND when women have the right and the ability to choose, they leave a bit of wriggle room for those who DO wish to have a larger family, so I truly fail to see what your problem is, unless of course you cannot wait to see a world with few other species left in it, because of some warped idea that the human race needs to continue to breed and breed, perhaps because they think some mystical being in the sky told them to,

If you truly believe that lot then I respectfully suggest to you that you have not thought through the logical consequences of your crack-pot theory on population control nor studied the history of what happened last time people proposed this kind of pseudo scientific bunkum.

You seriously think we can just go on breeding and breeding ad infinitum? I'm sorry but it is not me that is crazy.

Easiest way to get people to stop having kids is to make them rich.

Seems to work across class, race, nationality, all the different groupings.