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Carbon Taxes Not So Easy After All?

August 20, 2009

An increasingly common response to the controvesy and complexity that follows emissions trading policies  is to suggest a Carbon Tax instead.

In my view there are 3 main arguments put forth for a Carbon Tax (that are worth considering):

1. they’re more transparent since most stakeolders understand and are used to dealing with tax issues everyday. Thus, a tax approach can promote stakeholder comprehension and in turn positive engagement in the policy making process by the (concerned) general public.
2. people are used to linking the idea of taxes with idea of equitable distribution, whereas they don’t understand the distributional implications of handing out free permits. (ie that they are effectively buying back rights to their own atmosphere from polluters with free allocation of permits!)
3. Following from 1 and 2, it is argued, governments will be better able (or forced) to resist dulling the price signal to polluters by handing handing out so many free permits.

Note that #3 here is really the key issue, since it’s the final Governmet policy that matters at the end of the day. Also note that I don’t really buy the argument that Carbon Taxes are better for the economy because they allow the reduction of other taxes by government – so can emissions trading if you auction the permits and collect the revenue!

Now, today I read a little bit about the history of Carbon Pricing in New Zealand, which made me question each of these 3 arguments.

In 2002, the Clark Government in New Zealand announced its Climate Policy Package. The Climate Package had three main pillars. First among them was a plan for a Carbon Tax, to start from 2007, of just NZ$15 (=US$8) on energy, transport and industrial emissions assuming that the Kyoto Protocol came into force. Second, the Package aimed to impose an Agricultural Methane Emissions Levy as a means of gaining revenue for research into methods for reducing ruminant methane and nitrous oxide emissions from livestock. And third, the Package proposed the imposition of a devolved Kyoto liability on the deforestation of all pre-1990 forests which breached a ‘deforestation cap’ of 21Mt CO2e emissions.

However, in May 2005, when the Environment Ministry released new projections which showed New Zealand could expect to be short by 36Mt AAUs over the Kyoto period, the government opted to reassess its climate policy mix. In particular, it became clear that the exclusion of emissions from forestry and agriculture in the tax plan, as well as exemptions for large emitters – known as Negotiated Greenhouse Agreements – would have undermined the ability of the tax plan to deliver both the desired reductions in emissions and any claim to equitable treatment of industry .

The Clark Government’s next significant attempt to place a price on carbon came in the form of the Agricultural Methane Emissions Levy. In 2003, the Levy, known infamously in New Zealand as the “fart tax”, was proposed to be an annual tax on farmers of NZ$0.09 per sheep, and NZ$0.72 per cow. However, it soon created opposition and a storm of intense protests from farmers and associated groups. In fact, one National Party MP, Shane Ardern, drove a tractor up the steps of New Zealand’s Parliament as part of a protest against the tax . In the end the Government bowed to the pressure and tax was abandoned for a system of (milder) research contribution payments, which expired in 2007.

Equally unsuccessful was the Governemnt’s attempt to introduce deforestation liabilities on the felling of pre-1990 forests. This proposal also met with fierce opposition by forest owners, who claimed the system was unfair since they would not be able to gain credits from the plantation of post-1989 forests, but were liable for felling pre-1990 forests.

By 2005 the Clark Government abandoned Carbon Taxes altogether and went for Emissions Trading! Admittedly, New Zealand has a lot of crazy farmers who are opposed to everything, but that’s hardly the point, is it?

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