Protecting our Environment: Get Rid of the ETS

New Zealand is obligated under various international treaties and laws to manage her greenhouse emissions. She, like many other market nations, uses an emissions trading scheme in order to utilise the market to create a price for carbon emissions and thus, manage this negative externality.

Our emissions trading scheme, fittingly called the New Zealand Emissions Trading Scheme, functions by Government allocating allowable emissions (called units) to various industries and these industries then trade those units with each other and internationally, in order to reduce shortages and surpluses of units – a basic market structure. A deeper explanation is available on the website of the Government’s Ministry of Environment and the Wikipedia page on the scheme.

This, on the face of it, seems like a reputable and efficient system. But, as with all Fifth Labour Government (Clark-era) policies, it is filed with exceptions and loopholes.

The most glaring and dangerous exception is that given to New Zealand’s largest industry and emitter – pastoral agriculture. The NZETS covers only 56% of New Zealand’s commercial emissions (consisting of energy, waste and industry) – the rest is contributed by agriculture. Why does agriculture deserve this exemption? It doesn’t. Despite New Zealand’s romantic attachment to the land, farm emissions are often far worse for the global environment – being principally methane which is far more effective at trapping heat than carbon dioxide.

So why, then, does the New Zealand Powerhouse Institute argue for the complete abolition of the NZETS, rather than for the closing of the agricultural exception? After all, we are devoted believers in the power of free markets and what is the NZETS except a market?

Our objections to the NZETS boil down to one word: complexity. This is the same reason we argue for planning reform and a new SOE system. We believe that Government and private expenditures are better allocated to actually growing the economy and providing services to New Zealanders rather than grappling with complex systems of taxation and entitlements.

Our preferred alternative to the NZETS is simple – an emissions tax.

The Institute propose a Common Emissions Charge paid by firms on every ton of harmful emissions emitted no matter what industry they trade in. Provided we reformed the roading tax system, it would also extend a consumer variant of this tax – not discussed here – to personal fossil fuel usage. Each ton/partial ton of harmful emissions would be rated and taxed based on the harm it would cause to the environment relative to carbon dioxide.

The goal of the Common Emissions Charge will be to create a uniform and fair price for emissions in order to create a cost to damaging for the environment thus increasing the incentives for both producers and consumers to choose carbon-friendly options in accordance with the basic economic theory of externality pricing.

Our envisioned (commercial) Common Emissions Charge would be administered by a joint venture of the Inland Revenue Department, working with the Ministry of the Environment. Administration would be conducted through the annual return process already used to collect Companies Tax. Monies earned through the tax would be legislatively required to be allocated to environmental projects by the Government of the day.

The amount payable of the CEC for commercial entities would be calculated by the following equation:

Where t is tax payable, m is the mass of greenhouse gas emitted and h is the relative harm of the compound when compared to carbon dioxide.

The relative harms compared to CO2 shall be determined by the Ministry of the Environment in accordance with the best scientific research available and with no economic or otherwise unscientific considerations.

Opponents of the CEC may well ridicule the idea as a ‘fart tax’ as they have done whenever else the agricultural exemption has been challenged. This, however, is an unintelligent and unpersuasive argument. Whether or not it comes from animal flatulence, methane is a serious cause of global warming and should be minimized.

Opponents may also tell you that the Common Emissions Charge will cripple New Zealand’s agricultural sector. We – in fact I believe that the CEC will present an opportunity to New Zealand’s primary primary industry. It will allow the farming sector to diversify and innovate – creating the world’s first truly sustainable commercial farming industry – and market based on its green credentials.

The carbon tax is supported by almost all economists and the Common Emissions Charge is a strong and clever implementation of the idea that covers not only the harmful effects of carbon dioxide but all other greenhouse cases. The CEC escapes all the complications, exemptions and issues with the current dysfunctional New Zealand Emissions Trading Scheme. The CEC provides an opportunity for all New Zealand industry to innovate, will help to enhance New Zealand’s already strong 100% Pure brand image, and will allow the Government to fund new environmental projects.

 

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