Carbon Tax or Emissions Trading?
Emissions trading or a carbon tax? This is a question faced by many in the New Zealand climate policy arena. At Ekos, our strong preference is an upgraded Emissions Trading Scheme. Here’s why:
Carbon taxes and emissions trading instruments are two different ways to introduce a price of carbon into the economy. With a tax we know the cost but do not know the volume of emission reductions we will achieve. With a cap-and-trade emissions trading model we know the emission reduction target but do not know the cost. This is because prices in market-based-mechanisms are often the product of supply and demand.
The New Zealand Emissions Trading Scheme is a hybrid between emissions trading and a tax. It functions more like a tax, but one that is collected not by the government but by upstream entities in the energy sector, and where the price of this tax changes with supply and demand for carbon units.
Both tax and emissions trading instruments are able to be manipulated by governments who prioritize serving the interests of heavy emitters. Similarly, both tax and emissions trading instruments can be designed to effectively deliver emission reduction outcomes.
But it is a political economy - not just an economy, and policy instruments need to survive electoral cycles. This means that they need to appeal to the centre left and the centre right, sufficient to gain cross party support. This enables these policy instruments to function as goal posts that are deep-rooted, stable, and stay in one place. This enables the private sector to adapt to these instruments and get on with economic development under a "new normal" that does not flip and flop about.
New Zealand developed an emissions trading system that has functioned for the last 8 years. It could have functioned better, but it has functioned none the less.
Politically, the NZETS delivers a price on carbon without the word "tax" and for this reason people in the centre-right of the political spectrum have become comfortable with it, sufficient to vote in a National government three times without demanding the government get rid of any carbon pricing.
The private sector in NZ has woken up each morning for the last eight years with a price on carbon in the economy. They have noticed that the sun still comes up and the economy is OK with a price on carbon.
The price could be higher and it is possible to modify the ETS to put a price floor (for the forest industry), remove the "two for one deal", and eliminate the price ceiling (or at least lift the current ceiling significantly) to send a stronger price signal to institutional investors. It is even possible to set the price if necessary (e.g. $25 now and then incrementally increase it by a dollar per year until it more meaningfully approaches the social cost of carbon (conservative but robust global estimates have it at around US$41 at present).
But to scrap the ETS and rebuild a tax policy instrument now, we believe, would open up a political can of worms that will upset the apple cart and set us back a long way, and risk losing more than one would gain from the exercise.
Big emitters can negotiate easy terms (match fix) whether it is an ETS or a tax instrument. But we do not blame cricket for match fixing, and we do not blame emissions trading for unwholesome carbon price manipulation (e.g. letting Ukrainian junk carbon into the ETS market and driving the carbon price to below NZ$0.20 - this ended at the end of 2015 and the price is now up around NZ$17.50). And we like to avoid throwing out babies with the bathwater - especially when the NZETS is essentially a tax in drag.
We believe it is more politically efficient to incrementally improve the ETS by incrementally eliminating "get out of jail free" cards, and add complementary measures to amplify the impact of a higher carbon price.
We think it is important that climate change policy survives electoral cycles, and we do not believe that changing to a carbon tax will do this. It is a red rag to a blue bull and a good way to lose elections and provide a gift to right wing commentators who like to scare voters about the threat of higher taxes.
Furthermore, some big international climate policy shifts are currently taking place that potentially bode well for consolidating the carbon price. This includes the Internationally Transferable Mitigation Outcomes (ITMOs) under the Paris Agreement, and the CORSIA Agreement by the international aviation sector. A similar agreement may eventuate for the international shipping sector.
Emissions trading is also more palatable to the global private sector (where the vast majority of global money is located). We work in carbon financing and emissions trading settings, not because we have come from a market background and want to exploit this opportunity for private gain. In fact, we have come from an environmental activist background, and see carbon financing as a way to finance energy efficiency, low carbon technology uptake, growing and enhancing indigenous forests, stimulating sustainable land management, and biodiversity protection.
After doing considerable homework on emissions trading (and co-authoring 'The Leader's Guide to International Emissions Trading and Carbon Markets' - distributed to all intergovernmental UNFCCC negotiators a few years back) we came to realise its elegance politically, economically, and ecologically. Big solutions need big finance, and big finance needs to work politically in this global and national political setting.
Some tell us that emissions trading is inherently right-wing. This does not make sense to us as left-leaning environmentalists, who note that selling organic veges uses markets but is not inherently a right-wing activity. Some say that market based mechanisms for environmental protection encompass a commodification of nature and putting a price on nature. This does not make sense to us as "small is beautiful" ecologists/economists who develop and implement environmental market based mechanisms, based not on commodifying or putting a price on nature, but based on putting a price on the human labour and technology cost of looking after nature, and harvesting carbon finance for this task.
There are ways to make markets work for compassionate ends. In his coalition announcement speech Winston Peters talked about the need for capitalism with a human face. Social enterprise (where Ekos operates) is delivering on this and growing significantly as a sector world-wide and in New Zealand. It also provides a fertile context for sharing the financial burden of looking after the place between the public and private sector in an eco-political-economic partnership capable of building much needed resilience to a changing climate and reducing the rate of system change itself.
We have put our money where our mouth is by establishing and operating a market-based instrument that links people committed to a low carbon economy by measuring, reducing and offsetting their carbon footprint, and sourcing their carbon offsets from indigenous forest conservation and community economic development projects in New Zealand and the Pacific Islands.
Read more about emissions trading by clicking on the 'Leader's Guide' below. This explains the regime under the Kyoto Protocol that has now been superseded by the Paris Agreement. This booklet was co-authored by Ekos Executive Director Dr Sean Weaver through his consulting social enterprise Carbon Partnership. The other co-author was Murray Ward - formerly head of the NZ Climate Change Office at the Ministry for the Environment.