Why Would A Carbon Tax Be An Imposition On The Taxpayer?

Brian Fellow, writing in today’s NZ Herald, says the following:

The really big questions about a carbon tax, of course, are how to strike a tax rate and how often to adjust it.

The closer the tax is to the prices available in the carbon market the less commercial benefit there is for emitters.

But the wider the gap, the more the economic burden falls on taxpayers instead, and it is emitters’ behaviour, not taxpayers’, that needs to change.

We are not sure that this comment about the potential burden on the taxpayer is correct.

The issue here relates to the Government’s liability under the Kyoto Protocol.  We are emitting more greenhouse gases than we agreed to under this protocol so we need to buy credits from those who have them to sell to bridge the difference.   At present the New Zealand Government estimates our liability as being 21.7 million tonnes of Carbon Dioxide equivalent.  Today the price of carbon credits is Euro 16.15 per tonne.  At today’s exchange rate of 0.4339 this means the liability worth NZ$807.68 million.

There are various schools of thought here.  Some believe, that as there may be no replacement negotiated within the planned timeframe, that there will be no need to pay for this liability.  There is therefor no problem.

Others (we fall into this category) believe that if you sign and ratify a treaty you live by the terms of this treaty.  You therefore pay this liability.

But will a low carbon tax necessarily mean that the tax payer will have to pay the difference between the cost of a carbon credit and the cost of a lower carbon tax as Brian Fallow alleges?

We don’t think so.  New Zealand emits a far higher level of emissions than our Kyoto liability.  If a carbon tax is applied to all emissions, and if our initial goal is to cover the cost of our Kyoto liability, then by dividing the cost of our Kyoto liability by the number of years left until the liability is due, then the level of total emissions you come up with a figure that would need to be changed as a carbon tax than the cost of a unit purchased internationally.  last time we looked this up New Zealand emitted 77.861 million tonnes of greenhouse gases a year.  Divide out liability by 3 (3 years until we need to pay) and it equates to $269 million.  Divide this by 77.861 million and you come to a grand total of $3.45 per tonne.

This is why we believe that a carbon tax of $3.45 per tonne across all sectors and all gases is all you need to cover the cost of our Kyoto liability.  There is no reason for the tax payer to pay one cent beyond the cost of administering the scheme.

To ensure that there is no risk of a funding gap, we suggest that Government go out and buy the cheapest possible credits now.  They are very cheap.  The price paid can be the determinant of the level of carbon tax.

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