A New Carbon Tax

Posted on April 15, 2012
By Dr Muriel Newman

Last week the Minister of Climate Change released a consultation document outlining the government’s response to the 2011 Caygill-led review of the Emissions Trading Scheme (ETS). If you want to have your say on the proposals, a series of consultation hui and public meetings are being held around the country this week. Written submissions close on May 11^th. Full details can be found here>>>

In his announcement, Minister Tim Groser stated, “These proposed changes will enable New Zealand to do its fair share while ensuring the ETS doesn’t impact unreasonably on business and households.” The problem is with respect to what is unreasonable.

It has been estimated that the ETS has cost the average family of four around $750 a year since it was introduced in 2010. The government is now planning to double that cost to around $1,500 a year over the next three years.¹ The change won’t take place in a single step, but will be phased in – increasing by a third in 2013, by another third in 2014, with the final third in 2015. At that stage the average household will be paying around $30 a week in the increased costs for power, fuel, and most other goods and services caused by the imposition of a $25 a tonne carbon charge onto our economy.

The ETS was introduced by the previous Labour government as a mechanism to ensure that New Zealand complied with the provisions of the Kyoto Protocol, which required countries to keep their emissions of man-made greenhouse gases at no more than 1990 levels during the four year period from 2008 to 2012. You might recall that it was the former Prime Minister Helen Clark who signed New Zealand up to the Kyoto Protocol in 2002. But since the Kyoto Protocol expires in December 2012, the justification for the scheme to be continued also expires. After December there will be no international obligations to meet.

The latest figures, released last week by the government, show that New Zealand will easily meet our Kyoto Protocol obligation, with net emissions of 23.1 million tonnes less than our target. This result, however, is not because of the ETS.

Some of biggest reductions in New Zealand’s production of greenhouse gases occurred as a result of the drought in 2008. When faced with drought conditions, farmers have no option but to reduce livestock numbers. Since livestock contribute almost half of New Zealand’s greenhouse gas emissions – through the methane they belch out as part of their digestive process – slaughtering cows and sheep helped to reduce our greenhouse gas liability.

Higher rainfall helped too. When the lakes are full, hydro and geothermal generation, go a long way towards meeting New Zealand’s demand for power.

On top of all of that, the recession followed by the global economic crisis have dampened the economy – including output from the transportation and manufacturing sectors, two of the main contributors to the production of man-made greenhouse gases.

So if there is no international agreement to replace the Kyoto Protocol (if there ever is another global agreement it is not expected to be in place until 2020 at the earliest) why should the ETS be continued on past December when it is having such a negative impact on the economy and causing such hardship to families?

The answer to that question can be found buried in those changes to the ETS that National announced last week. The government intends to convert the ETS into a permanent carbon tax – not a transparent carbon tax like the ill-fated ‘fart’ tax on livestock proposed by the Labour Government in 2003 and strongly rejected by the public, but with a tax that few taxpayers will recognise or understand.

When the Australian government announced their controversial carbon tax last year, they went to great lengths to ensure that the public did not bear the cost. Some $15 billion worth of tax cuts and other benefits were proposed to compensate households for the cost. In total, 90 per cent of households are expected to get tax cuts and/or extra payments when the $23 per tonne price kicks in on July 1^st this year. These tax cuts and other compensation measures are meant to ensure that the average household will be 20 cents a week better off, not worse off.

So there you have it. In Australia when they introduced a carbon tax, the government went out of its way to ensure that the cost will not fall on households, so that families will not be worse off. In contrast, New Zealand’s Emissions Trading Scheme was specifically designed to ensure the cost falls on households. Former Minister Nick Smith verified this objective in a report issued last June, in which he outlined the success of the scheme in transferring costs onto consumers: “Early signs are that a price on carbon has successfully entered the New Zealand economy; businesses and foresters are factoring in this price into their long-term decisions and passing the price of carbon down to consumers”. The report confirmed that the Transport and Energy sectors have been able to successfully “pass the full cost on to customers”.²

Before the Emissions Trading Scheme was introduced, many businesses expressed concern that a price on carbon would be unaffordable and could affect their viability – especially those competing against rivals in countries that do not have carbon charges. Many of those businesses will have managed to cope with the present carbon prices. But doubling the charges will inevitably force some to close, others to lay off staff, and some businesses with a strong manufacturing component may need to relocate offshore to countries where such arbitrary costs are not imposed.

The problem for Tim Groser is that the objective that New Zealand should do its “fair share” while ensuring the ETS doesn’t impact unreasonably on business and households, cannot be achieved under the present ETS. It has been designed to ensure that New Zealand does far more than its fair share, as the former Minister Nick Smith explained to Parliament when the law was first being introduced, “On 1 July 2010 New Zealand will have the first emissions trading scheme up and running outside Europe, and it will cover more sectors than the European scheme does. We were also the first country in the world to include forestry, in 2008, and we were the very first country in the world to have a plan for introducing agriculture, in 2015. If we can settle our emissions trading scheme by December, we will be at the front end of international action on climate change, and will actually have the most comprehensive emissions trading scheme of any country in the world.”³

The point is that New Zealand’s ETS is the only country-wide trading scheme in the world outside of the European Union. The EU scheme is not an “all gasses, all sectors” scheme like New Zealand’s, but instead it targets just 43 percent of industrial emissions. It excludes the transport sector, households and small businesses, agriculture, and construction and waste. In addition, the EU scheme is based solely on carbon dioxide and excludes methane, which is such a major part of our emissions profile.

If National had modeled their ETS on the EU scheme, to include only manufacturing and heavy industry, the cost burden on the country would have been minimal. But rather than deal fairly, by excluding food producers, households, small businesses and transport, National has lumped all sectors into the scheme (as did the Labour Party that they criticised so strongly).

Barry Brill, this week’s NZCPR Guest Commentator, who is a former National Minister of Energy and Chairman of the Climate Science Coalition, explains how Nick Smith denied that the ETS was a tax in his article The Great Government Green-wash:

“‘It is not a tax. The Government does not receive any revenue.’ These words have appeared in thousands of letters sent out by former Minister Nick Smith. And he was believed. The ETS basically took money from the energy sector and transferred it to the forestry sector, and we all paid for it.

“Last week, the Government heralded its intention to convert the ETS into an Energy Tax Scheme. In future, the energy companies will have to buy their NZ Units (carbon credits) from the Government. The Government will pocket the cash revenue. It gets worse. The Minister will have power to ban imports, so as to be a quasi-monopoly supplier. Auction prices will be pushed up to $25 from the current market level of about $7 per unit. On top of all this, the obligation on energy companies will be doubled over three years. In summary, the burden on energy companies is to increase from $7 to $50 for two units. Virtually all of this 7-fold increase is a new tax.”

“The Government will say that the direct burden on a household of four will be only $1,000 per year. But this is more deception. The electricity, petrol, gas and diesel companies will all add their normal margins, as will the transport firms, importers, retailers, insurers, Councils, etc. It will all land on the householders and exporters -– who can’t pass it on. The Reserve Bank estimates the “first round effects” will be about 150% of the direct costs. And then there will be second round effects. What about saving the planet? Oh yes, I forgot. That’s an important ingredient too – but only in the politician’s speeches, not in the actual policymaking. It’s called green-washing, and it’s an offence against the Fair Trading Act.”

Barry wrote to the Prime Minister last year, just after the election, to urge the government to abandon their plan to double the cost of the ETS, especially as no figures have been produced to justify such a decision. To date, he has not received a response to the concerns expressed in his letter.

As well as increasing the cost of emissions and converting the ETS to a tax, the government is planning a number of other initiatives such as delaying the introduction of agriculture into the scheme until 2018. No such luck for the synthetic gas and waste sector, which will enter the scheme in 2013, no doubt, like everyone else, passing their costs on to consumers.

President Ronald Reagan once said that a government bureau is the closest thing to eternal life that you will ever find on this earth. The plan to reincarnate the bureaucratic ETS – a mechanism to fulfil the demands of a specific United Nations Treaty – into a permanent taxation mechanism is just such an attempt.