We don’t talk about climate change on TransportBlog that often, although we should – transport is a big contributor to emissions, and the most obvious opportunity for NZ to reduce its emissions.

But most economists would agree that the best starting point for tackling emissions is to price them properly, so people and businesses are incentivised to change their behaviour. Currently, we’ve got an Emissions Trading Scheme, but it has been almost completely ineffective, because the prices are too damn low. The current price for an emissions “unit”, equivalent to one tonne of CO2, is about $19 – but over the last few years, they’ve often been only a few bucks, or at some points less than a dollar.

By comparison, a litre of petrol creates around 2.3 kg of CO2. An emissions price of $100/ tonne would add about 23 cents per litre (plus GST) to the petrol price. Not much, but enough to prompt some behaviour change – a few more people might take the bus, or cycle, or simply drive less.  At current prices, it’s more like 2 cents.

But reducing emissions doesn’t come free – there’s some short-term economic pain to come from it. The challenge will be how to cut emissions, while keeping the economy going strong. To that end, Sina Mashinchi has been looking at the macro effects of different climate policies. There’s a summary of his research below, along with a ‘poster’ explaining it – which won Sina the New Zealand Economic Policy Prize at this year’s NZAE conference.

poster-nzae-2016

New Zealand’s attempt to lower climate change-fuelling emissions by trading carbon credits is failing. But there’s good news: introducing a carbon tax and beefing up the Emissions Trading Scheme (ETS) could substantially lower emissions and lower GST – a win-win for our environment and economy.

Sina Mashinchi, a University of Auckland and Energy Centre doctoral researcher, has developed a new modelling that measures the impact of carbon pricing on New Zealand economy. Unlike previous modelling attempts by the government which used computable general equilibrium (CGE) based energy models, the new modelling approach in his study follows the historical behaviour in New Zealand economy and its responses to the various shocks, crises and policy implications through the years since 1970.

According to the findings in this research, New Zealand will need to set higher carbon prices in order to close the emission gap, but even with a carbon price at $355 in 2030, emissions would fall 14.2 percent from current levels which would be only a half of target reductions (around 27 percent) in 2030.

Sina experimented with mixes of a beefed-up ETS and a carbon tax. He found if the price of carbon credits increased to $75 right now, and rose by $20 a year from now on, and a carbon tax for non-ETS sectors was introduced and set at the same levels, the government could use the extra tax take to lower GST by 2.5 percent to 12.5 percent. This would stimulate the economy, encouraging investment in new technologies, energy efficiencies and public transport, which would create jobs. GDP would rise by an average 2.2 percent per year from 2016. This still falls short of our emission targets, but it’s a lot better than emissions going up.

Sina believes this move would be a win-win-win – good for the environment, good for the economy and good for consumers who would end up paying less GST.

What do you think? Assuming the government can get past its “business as usual” stance, what should we be doing about emissions?

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55 comments

    1. Carbon credits are an absolute croc, largely invented and supported as just another financial tool for brokers to make money out of. Carbon taxes are pointless. If the only option is to use taxed energy then what do you think will really change? Nothing. All that will happen is the burden on those people will simply increase. The off presented perfect world dream, and dream it is, that taxing will make people rush to PT and other forms is stupid. The smartest way to move forward is to make alternatives, such as EVs etc much more affordable. That would be intelligent.

  1. Carbon credits and carbon taxes are both neoliberal crap aimed at getting the market to magically fix all our problems. They don’t work. The idea of a “win-win” is flawed. If we seriously want to reduce carbon emissions, many industries will lose, and they have to. This isn’t a job for economists and their flawed models. It needs to be about legislation, hard rules and enforcement.

    The government has an incredibly effective tool at its disposal to reduce carbon emissions. Pass laws mandating reductions in carbon emissions. For example, setting a compulsory exit from power stations burning coal and gas, banning any extraction of carbon through mining. Set compulsory targets for transport agencies and local government to reduce numbers of vehicles on the roads and increase proportion of people using public transport and active modes.

    Price setting may be a useful mechanism when it comes to influencing consumer behaviour, e.g. in relation to petrol. But it should be an exception.

    1. How is the government charging a tax on something we want less of and spending the money on things we want more of neoliberal. Do you even know what that word means?

      1. Yep. Trying to solve our problems by packaging them in a form that has a monetary value and hoping market forces drive the correct behaviour. Moving the responsibility from the public to the private domain. Sometimes effective but overused and an abdication of responsibility by governments.

    2. “banning any extraction of carbon through mining”

      In order for that to be effective it would have to be a worldwide ban and that would spell the end of steel and cement.

      1. Yeah OK, maybe not all extraction. But certainly ban exploration for new oil, gas and coal. The amount we have in production already exceeds the carbon budget. NZ doesn’t need to wait for everyone else. We’re a tiny proportion of the problem, but we can lead the solution. We can be an innovator, an example to the rest of the world. If our government gave a crap.

  2. Philosophically I am fundamentally opposed to Nick. He appears to be a little statist for my taste and, I think, history shows that rules and laws can be circumvented. Passing a law and then attempting to enforce is one mechanism but the real problem I think is that people are not actually paying for their pollution.
    The current regulatory framework means that pollution, e.g. carbon from cars, is dumped into the public space. Try dumping pollution on private property and see what happens. If a person was charged so much per tonne of carbon put into the environment via a carbon offset then they will re-think how they pollute. It would also have to be a separate charge, not built into petrol, as that just gets swallowed into the general costs.

    1. “If a person was charged so much per tonne of carbon put into the environment via a carbon offset”

      Maybe we could call that charge a ‘carbon tax’ and the government could perform the offsetting to make sure it is nationally coordinated?

  3. The missing markets theory is fine (in theory). But in practice it is just a load of bollocks. The market is missing for a reason. All a trading scheme does in incentivise cheating and bewilder well meaning people. I mean why on earth should we pay money to former eastern block countries for carbon credits just because their dirty industries collapsed after 1990?
    At least a carbon tax allows the money raised to remain in our country and be spent on things New Zealanders benefit from. Our government has to collect taxes so I see no problem getting some from people who burn carbon. The sooner we dump the cap and trade sham and move to a Pigouvian tax the better.

    1. A tax might work – but only if it the person who pays the tax can alter his or her behavior. Otherwise, like GST, it is just another tax.

      1. Everyone can alter their behaviour. And people certainly do change their behaviour in relation to taxes, including GST.
        What you perhaps mean is that a carbon tax wouldn’t cause people to change their behaviour very much, i.e. “demand” for emissions is quite inelastic. We don’t have good evidence as to whether that is the case or not.
        At any rate, like mfwic says, carbon taxes are Pigouvian – they’re not taxing for the sake of it, they’re taxing to fix a problem with the market.

        1. I work in finance and here is an example of what I mean. If you go to a merchant and pay with a credit card very few will pass on the interchange fee. This means the person who bears the cost, the merchant, does not chose to incur the cost. Therefore, there is little change in consumers’ behavior because they do not bear the cost directly. However, if a person is charge the fee (often 2.5%) then he or she does change behavior such as using EFTPOS that does not have a merchant fee.

          1. “I work in finance and here is an example of what I mean. If you go to a merchant and pay with a credit card very few will pass on the [Carbon Tax]. This means the person who bears the cost, the merchant, does not chose to incur the cost. Therefore, there is little change in consumers’ behavior because they do not bear the cost directly. However, if a person is charge the [carbon tax] then he or she does change behavior such as using [lower carbon alternatives] that does not [incur as much carbon tax].”

            Your example is literally the perfect example of ‘taxes’ changing human behaviour.

          2. For GST, you need to consider the situation with the tax vs without the tax. Without GST, prices would be lower, and consumers would buy more of them (you’d shift along the demand curve). GST encourages people to reduce consumption and save more.
            Similar story with our other main taxes: income tax reduces the incentive to work, company tax reduces the incentive to make profits. Depending on the rates we put on the various taxes, activity will swing around, or reduce, or increase, or make some other response.

            A carbon tax would raise the prices of emissions-intensive products. As consumers (or businesses, for that matter), the natural response would be to consume less of those products, or switch to less emissions-intensive products.

          3. “A carbon tax would raise the prices of emissions-intensive products.”

            Only if it were applied worldwide , otherwise it just raises the price of the locally-produced products and makes imported products relatively more attractive (or makes our exports of such products less attractive).

          4. “we can carbon tax imports.”

            How are you going to tax the greenhouse gases released in the production of, say, an imported refrigerator?

        2. So funny and full of theory. Steam ahead with such nonsense and the poor get poorer. Think about who ultimately pays? It won’t be industry and it won’t be the wealthy. Trouble with people who obsess about new taxes is they never think it through. A bit like waiting for uni graduates to get blooded with reality.

          1. Funnily enough, carbon tax advocates have thought about that. Two proposed solutions are a) redistribution of the funds collected and b) using the funds collected to reduce other taxes. Such as GST, which you may have noticed mentioned in the post and on the poster, as well as in several comments…

      2. If you are indifferent to using a car or the bus and the price you pay for petrol goes up then you will swap to the bus. At worst the Government gets to collect some tax, but more likely it will make people burn less fuel and raise some tax. By comparison the current system just sends some cash off to whoever overseas is best able to create dodgy credits.

        It would be up to the Government to either spend the tax on the people or reduce other taxes.

        1. yes I tend to agree. The other benefit of carbon taxes is that the revenue they generate can be used to offset distributional effects. And I think it’s possible or even likely that a carbon tax would be regressive, in of itself. That’s OK, provided that the revenue raised is spent in an even more progressive manner.

          In contrast, carbon credits generate no revenue that the government can use to manage distributional effects.

  4. So have the percentages changed and now transport is a big contributor to emissions in NZ? Wasn’t it just a little while ago ago that the biggest emitters were bovine? Of course there was no carbon (fart) tax charges implemented there. So much for economists and their opinions on pricing emissions properly. Carbon taxing doesn’t work, has proved so and is just an excuse for extracting more $ from the public.

    1. “So have the percentages changed and now transport is a big contributor to emissions in NZ?”
      Transport has been a big contributor (25% plus for decades.

      “Wasn’t it just a little while ago ago that the biggest emitters were bovine?” Several things can be big while only one can be the biggest.

      “Of course there was no carbon (fart) tax charges implemented there.” Correct, no carbon tax has been implemented in New Zealand.

      “So much for economists and their opinions on pricing emissions properly.” Economists have different opinions, but it is almost unanimous that the price isn’t fair because the missing supply cap was far too high and the market is easy to manipulate.

      “Carbon taxing doesn’t work” When has it been implemnted and not worked?

      “has proved so” when and where?

      “and is just an excuse for extracting more $ from the public.” I think avoiding ecological calamity is a good enough excuse to extract some dollars. The charge for carbon could be like the council’s charge for water: used to decrease other government charges (tax), and as an added bonus save the government money by not having to pay 10s of Billions in cyclone damage.

  5. Yes please! I think this is a strong case for the government to step in with some form of mandatory domestic carbon tax – trade it off against company tax or GST if necessary to stay tax neutral. Without need of further stimulus, there is a whole manufacturing industry in green tech which could benefit while also giving a reason for our kids to stay in NZ other than (a part share in) residential property development and speculation. The current carbon tax is at least long last showing signs of bounce back from it’s nadir as a dumping ground for fraudulent Eastern European tax credits. It is the only international economic measure of carbon performance, and as imperfect as it is, it is the way forward. But it will need to be supplemented with a little government tax led redistribution of income away from the big carbon emitters.

    1. Once again, who do you think will get lumbered with your new tax? Glad none of you are in influential positions. Think things through.

      1. So how do you propose to reduce carbon use? How do you propose to make EVs more affordable?

        There has to be an incentive for car makers to build more of them cheaper.
        One way to incentivize this is to tax carbon at the petrol/diesel pump. Result = greater demand for EVs = more R and D money to make them cheaper and better to sell to more people. A perfect virtuous circle.

        It is indeed unfortunate that too many of your sort are in influential positions, only too willing to kick the can down the road and let future generations pay/suffer the consequences.

        1. They are already doing this. New Zealand implementing a carbon tax isn’t going to change it. There are other global organisations who have far more sway like the EU or the CAFE regs. All you’d be doing is taking money out of people’s pockets. Who do you think would be buying EVs? Hint: it’s not the guy living paycheque to paycheque each week.

  6. It’s not mentioned in the post above (except indirectly in Sina’s poster), but one of the glaring flaws with the ETS is that it excludes agriculture, which is about half our emissions. That exclusion should have been gone by now, but it isn’t.
    It’s true that there aren’t well-developed ways to reduce emissions on a dairy farm, for example. It’s also true that our dairy farms tend to be lower emissions than overseas dairy farms.
    But leaving out agriculture meant that farmers were subsidised by everyone else, during the years when NZ paid for its excess emissions due to the Kyoto Protocol. It also meant that many sheep farmers switched to dairying during the years of high dairy prices, with no regard given to the (much higher) emissions from dairy farming – so the incentives were wrong.

    But my personal view is that we should scrap the ETS and adopt a simpler carbon tax, covering all sectors and emissions. That tax could start smallish and step up gradually over time, following a well-signposted path and (hopefully) free from political interference. The revenue raised would be used to pay NZ’s international climate obligations as required, and to lower other kinds of tax (income or company). The Greens had a policy along these lines, I believe.

    Once we’ve got better developed world carbon markets, we could bring in a better thought out ETS then – if the system is well designed, countries should be able to trade where some of them can reduce emissions more cheaply than others.

    1. John for simplicity of argument and this article – what if GST and a Carbon Tax were collected together?

      15% GST – 0% CT (2016), 14.5 GST – .5% CT, 14% GST – 1% CT … 12.5% GST – 2.5% CT (2021).

      In five years we could implement a 2.5% Carbon Tax with a reduction of GST to 12.5% with no change to the way we collect our current GST at POS.
      This could then be expanded over 10-20 years as required – 15% GST – 5% CT, 10% GST – 5~10% CT etc.

  7. So if we are struggling to meet our emission targets we need to look at some of the reasons why.
    SInce 1990 our population has grown from 3.33m to 4.7m an increase of 1.37m (41% increase). With such an increase naturally emissions will increase (more consumption, more driving, etc). We have also increased farming emissions and reduced forestry planting.
    Our population natural rate of increase is far far less than this and we would likely only be pushing 4m now if it weren’t for the open floodgate immigration policy both National and Labour seem set upon (and to which this blog wholeheartedly supports despite it’s effects on things like emissions, housing affordability, unemployment rates, cost of living, and quality of life.
    At current rates we will hit 6m people in little more than a decade (ie nearly double the number of people we had in 1990 which is the target year for emissions).

    1. if we assume that migrants don’t change their patterens of consumption when they move to NZ, then they have a net zero impact on global carbon emissions.

  8. The fact that 2016 is marginally warmer than 1998 demonstrates that the climate models that predicted it would be much warmer are worthless.

    The reality is that the climate changes naturally and man-made carbon dioxide does not cause dangerous global warming.

    So why should we be taxing something that does not cause global warming but does make plants grow better and so benefit agriculture?

    1. Brian. Very few people will take you seriously these days if you continue with a flat-earth view in the face of extensive and credible scientific evidence.

      You may very well believe your own words; but as someone who has young children I fully intend to take action to support a future world worth living in. Maintaining Luddite views on carbon will clearly achieve the opposite.

      I’m not really interested in the increasingly discredited opinions of the residual lunatic fringe. Please note the polite tone of my words – but in the end, I offer you no apologies. Too much is at stake.

    2. You do yourself, your discipline, and humanity in general a disservice by continuing to promulgate unscientific nonsense. There is an overwhelming scientific consensus that anthropogenic climate change is occurring.

      As someone younger than you who will live with the consequences of climate change for much longer, I would kindly ask you to cease spreading dangerous misinformation.

  9. NASA: ‘Planetary warming does not care about the election’

    https://thinkprogress.org/october-predicts-hottest-year-ever-2016-7307744601d2#.lmx2fof65

    If we see some effects of climate change in the next few years it might give some impetus to cutting our CO2 and methane but I’m not expecting anything from this government.

    I believe a tax is still the easiest way and as it would effect the poor more than the wealthy I would use the funds to lower public transport prices.

  10. Sadly, most of you do not understand how Carbon credits work 🙁 Even more sadly, it appears that on some points at least – I am agreeing with the cabin boy.

    The people (I mean the Green voting minority and the liberals – no attack intended) demand a change to emissions. The Government does not want or cannot afford to pay for these changes. So the Government invents a scheme, where the consumer pays. You want to have a 10% bio blend, even though it costs twice as much to produce Ethanol and Bio Diesel than fossil fuels? OK – well that has to be paid for. In a Carbon Credit environment, the burden of paying these costs is moved to industries that create emissions. Of course they pass the costs on to their customers – but what do you expect – Charity?

    The alternative would be that ‘green’ fuels would cost a lot more to produce and no consumer would use them. Do you really want the eco friendly family in their E100 powered car to pay more per litre than the broker in his Ferarri? Do you really want Tesla cars to cost even more?

    Of course carbon credits are a good thing. The problem exists when Governments and they all do it (Green, Red, Blue) release more credits into the market because it is an easy access to revenue.

  11. I think we just need to be cautious, balance emissions policies with economy. It’s worthy to note that in NZ the markets actually seem to be sorting this out themselves. Electric cars are starting to grow in popularity, clean-renewable energy is being heavily invested in by the large energy companies etc. And this is being driven by the consumer. So the business as usual is not such a bad strategy.

    Personally I would like to see carbon emission tax being implemented in 5-10 years when electric vehicles and viable alternatives for the industries are more readily available.

    1. I would argue we don’t have time to do things slowly. The science suggests we need to get on to dramatic reductions as soon as we possibly can. As it is, we’re likely to miss the 1.5c limit.

      The timeframes and the magnitude of expected effects of climate change are key pieces of information when it comes to discussions on any pricing mechanism.

      The longer we leave it the more sharply we must reduce emissions and the harder it will be to limit the negative impacts on the economy.

  12. A great post, and the one key factor that has not yet been mentioned is the Paris Agreement.
    This means over 190 countries and all of NZ’s trading partners have agreed to reduce emissions and this most likely will be by putting a cost on them.
    So if NZ puts a Carbon Tax (which I support especially if it reduces income-tax – how great would that be!) or a higher ETS carbon credit cost it will not have a big negative impact because our costs have suddenly become more expensive, as other countries will also be putting costs on their goods in the near future.
    In fact those who put costs on now will be at advantage because they will be more efficient and will be leading the way with products which have a lower carbon footprint which will have a higher demand.

    In regards to the farming sector – people seem to forget our market has gone through major shocks in the past like in the 70’s when the UK no longer wanted all our beef & lamp and in the 80’s when protection was removed.
    The sooner a cost is put onto farmers at a low level and the transition is managed the better it will be for them than a sudden ‘you must take into account your methane emissions) due to external pressures at some future point.

  13. Tax and dividend. Charge a carbon tax, but then return the *entirety* to the population – a flat return of ~$1000 to every person with an IRD number would be very popular.

    Enough with extremely indirect instruments.

  14. Where’s transport accounted for in the emissions pie chart there; energy or waste?

    Thermal power generation would pretty much exit the market if the smelter in Bluff closes; in theory the smelter can give 1 year’s notice on 1 Jan 17, so don’t think that NZ’s energy production (electric at least) is inextricably tied to carbon.

      1. Not quite – the inter-island HVDC link is being upgraded at the moment, so power would go off in the North Island! The price increases which could be effected by upping carbon charges (above what is currently passed through from ETS liability and future increases as subsidies go away) wouldn’t send a strong enough price signal to residential users to be discerned from the normal ups and downs, and large users (i.e. most of NZ’s load) will just eat the cost rather than curtail demand.

  15. Economic growth is our problem, if we want to cut our impact on the earth then economic growth has to go into reverse and I don’t see any way of getting people to agree to it, While we have governments thinking electric cars are the way forward we are missing the point of why we have a problem, it’s not lowering our emissions it’s stopping our emissions climate change is not about more efficient cars it’s about 400 ppm CO2 and rising.

    Even if we stop putting any more CO2 into the atmosphere we are still committed to 30 years of rising temperatures as the earth readjust to what is already locked in.

  16. WHAT?

    My high-school physics (I am 65 years old now) tells me that 1 litre of WATER weighs 1kg. Gasoline is intrinsically less dense than water (.75kg). So how can less than 1kg of gasoline create 2.3kg of carbon dioxide?

    Ahh! I live to be wrong – well right so far as above. It is astounding that various Web sources (some authoritative) confirm this times 2.3 factor is quite ‘approximately’ correct. So when 0.75kg of gasoline is consumed (1 litre), we have created about 2.3kg of carbon dioxide. There is the by-product of water that relates to efficiency but basically the above is true.

    Roll on renewable energy sources – yesterday.

  17. Chemistry rather than physics provides the answer, Jim. Around 73% of the mass of a carbon dioxide molecule is oxygen and that oxygen comes from the atmosphere. Most of the mass of hydrocarbons derives from the carbon since hydrogen is a very light atom.

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