CARBON PLAY: TAX OR TRADE

I've echoed global and Kiwi business calls for a price on carbon before. Pricing carbon is a key means of reducing greenhouse gas emissions. As businesses strive for cost efficiency, there is direct incentive for them to address carbon efficiency and thereby lower emissions.

In New Zealand a big reason for pricing carbon is to provide investment certainty. The situation has been clouded ever since farmers marched on Parliament in 2003 to quash the "fart tax" proposal.

The two options for pricing carbon are invariably a cap and trade system or taxation. Last week a report sought by Business NZ and some of the largest GHG emitters in New Zealand was released. It strongly advocates cap and trade over tax.

Businesses able to pass the cost of carbon to their customers should buy emission permits. Those "at risk from international competitors with no similar obligations" would be "given" permits so long as their operations met international best practice.

Elsewhere, in March the Greens came out with their "framework policy for climate change". Its cornerstone is a carbon tax levied where carbon enters the Kiwi economy. So unlike GST, and unlike the Governments back peddled 2005 carbon tax, there's no explicit extra to pay at the till.

Both the Greens tax idea, and the latest big biz idea will heavily favour clean energy generators like Meridian.

Brian Fallow - biz writer at NZ Herald - has summarised current sentiment particularly well. He points out that our tiny emissions profile dictates that big countries like US and China should move first. He also notes that we shouldn't impose cost on biz before our major trading partners do.

This is the particularly self interested perspective of business - but not particularly surprising. Crucially, it has a sense of prolonging the inevitable. Even a sense of "head in the sand".

Some perspective can be found in an interview on National Radio's Our Changing World a few weeks back. VUW's Dr. Sean Weaver explains (audio, 8 or so mins in) that global carbon trading activity is presently akin to pre season training for when Kyoto kicks in next year. That's when Kyoto nations become liable.

Notably, Dr. Weaver points out that voluntary carbon markets (in Oz and US in particular) are equally active in allowing businesses to benefit from being more carbon efficient. Trading activity effectively provides businesses with "environmental responsibility certificates".

By imposing a carbon tax, the NZ Government may well deem carbon trading redundant for our businesses. But a key advantage of tax over trade is that there's less leakage. Potential for leakage demands that the tax is imposed where carbon enters the economy (like the Greens proposal) where carbon measurement is easier and more cost efficient.

With trading, each individual company that wishes to engage must measure their own emissions in order to obtain a quantity to trade. There's not only room for error, there's room for creative carbon accounting that can skew outcomes.

Pricing carbon (with either tax or trade) gives our businesses direction. It will give a potential market incentive to mitigation technologies like those being advanced at Landcare Research. It will also give our export markets the increasingly called for assurance that Kiwi producers are addressing emissions.

I for one support a carbon tax. The NZ Government will come up with its solution "soon". Which way will they go?

Backgrounders:
Carbon trading 101: Dr Sean Weaver on National Radio (audio).
Gristmill: kickin it with cap-and-trade
Alternet: the problems with cap-and-trade
Gristmill: tax-and-trade - why not both
Carbon Tax Center: blogging the benefits of carbon tax
Pigou Club: more on the benefits of carbon tax